How are a building’s service charge costs allocated between occupiers?
The term apportionment is the mechanism by which the costs of providing services to the shared areas of a multi-let building are split between the different tenants of the property.
The process of allocating service charge expenditure across a building normally involves two processes: the scheduling of costs, and the apportionment of costs within a given schedule to the different demised areas. Scheduling is used when user groups each obtain differing levels of benefit from a particular service, and therefore unique sub-groups of tenants are identified for the determination of cost within individual schedules. While the precise scheduling process is rarely fully articulated in most leases, it is invariably undertaken by the landlord/managing agent by applying the common lease wording that cost allocation between tenants should be “fair and reasonable”.
In contrast to the scheduling process itself, the apportionment of costs within schedules is a protocol that is often explicitly prescribed in leases. The most common approach to allocate costs within a schedule is to use a predetermined ratio based upon a tenant’s demised floor space divided by total lettable floor space available across the whole building. For multi-let retail buildings, it is common to utilize a weighted-average approach to such allocations, which benefits larger occupiers, and this method is described in detail within the RICS Code on Commercial Service Charges. However, from our investigation of the apportionment provisions within 90 UK office leases, no document utilized a weighted average approach to allocate costs within schedules.
The Model Commercial Lease includes the following apportionment provision:
“In calculating the Service Charge for any of the services, the Landlord’s surveyor may make any adjustment that is fair and reasonable in all the circumstances, having regard to the relative degree of benefit obtained by the tenant and other tenants at the building from those services, including by dividing the services and charges set out in Part 3 of this schedule into separate categories and apply weighting to those categories to take into account differing users or operating hours”
The provision specifically mentions scheduling as a permittable way for differentiating costs by the service benefits obtained by different user groups within a building. For many smaller office blocks, there may be only one schedule, although most UK multi-let offices commonly have two or more schedules.
From our investigation of 90 office leases, the following provides a good illustrative example of how the apportionment process is articulated:
“The Tenant’s Proportion is a fair and reasonable proportion. …It shall be determined by the landlord’s Surveyor (acting reasonably) who shall have regard, among other things, to the net internal areas occupied by different tenants and to the extent to which tenants and occupiers of the building make use of the services outside normal business hours and the nature and intensity of use of the Premises by the Tenant (and by other tenants and other occupiers of the Building of the Premises demised to or occupied by them)”
The research focused on identifying the transparency and clarity within apportionment lease clauses, including whether the apportionment basis was fixed in nature, based upon floor area, and whether the landlord is allowed to vary it depending on the services provided. The results of the research were as follows:
Aspect Characteristic present, and clearly described No detail provided, or could not be identified Total
Apportionment basis could be identified as being fixed or not 27 63 90
Apportionment based upon area 36 54 90
Landlord permitted to vary scheduling and apportionment basis based upon services provided 33 57 90
In theory, cost apportionment based on the total floor area occupied by those who benefit from the services within a schedule appears straightforward. However, in practice there appears to be variation in the allocation of costs across schedules, especially if one invoice is the original source of the expenditure. For example, if one invoice for cleaning is believed to benefit the retailers within a development more than the office occupiers, a manager may choose to allocate a different percentage of the total invoice to the retail schedule than the office schedule. This splitting of invoices between schedules is a practice that should be transparent, articulated to all occupiers, and the rationale underpinning each schedule’s cost calculation must be objective and verifiable.