Landlords committed to better occupier relations

Copyright: David Lawson Published Property Week June 2008

Relationships between UK landlords and occupiers are a standing joke – or would be if any hint of laughter was not obliterated by curses. Those occupiers spend enormous amounts of money getting closer to customers, so they are in a permanent state of shock at treatment by their own space suppliers.   It all stems from a tradition of long leases, where landlords cared little for the welfare of tenants locked into paying for services over which they have no control. This is changing as leases shorten and occupiers become more demanding but there is still a long way to go.

   Some of the biggest landlords are committed to improving this fraught relationship. ‘But you can’t make progress unless you can measure what is happening,’ says Howard Morgan, managing director of consultant Kingsley Lipsey Morgan [KLM], which set up Real Service to share best practice and set benchmarks.

   This enlightened approach seems to be paying off, as the index compiled by Real Service from 25 key indicators has risen from 56 to 77 in four years. Yet only a couple of weeks ago a different index compiled by KLM for the Property Industry Alliance showed occupier satisfaction rose a mere two points last year to reach 57 out of a possible score of 100. A long-running study by Loughborough University Business School also found little improvement in the inept and often unfair way agents managed more than £4bn of service charges last year.   

   Variations are not just due to differences in perception between occupiers and landlords. The Occupier Satisfaction Index is compiled across the whole industry, whereas Real Service concentrates on market leaders. This implies that the problem lies with the mass of smaller owners and managing agents less committed to improvement. But it still shows how far the bulk of the industry falls behind standards its own customers consider critical for business success. Service charges, in particular, continue to be a running sore. Value for money again generated deepest dissatisfaction in the Property Industry Alliance survey.

   Managing agents get most of the flack as they deal directly with occupiers. The RICS has tried to calm resentment among occupiers - and government impatience with disputes - by toughening up the third edition of its Service Charge Code. This includes:

  Is the new code making a difference? It is still too early to tell, as the guidance notes only came into force last April, says David Barrass, managing director of service charge consultancy Property Solutions.   The Loughborough report, widely attributed with kicking the RICS into action after  revealing widespread problems several years ago, also postponed judgement when the latest update crept out with minimal fanfare in April. Lead author Dr John Calvert takes the strict academic view that there is still not enough data to produce a clear before and after view.

    But he still gave a damning indictment based on information from the report’s sample of around 4.5% of multi-let offices in England and Wales and repeated recommendations for root-and-branch changes. The report condemned slow progress, quoting the poor percentage of buildings that have achieved ‘easily measured’ key issues in the new code.  For instance, only a tiny percentage of budgets arrived one month before the charging period and only 15% were within 2% of the service charge target set by the code. Meanwhile, more than 75% of agents are still charging percentage fees.  

  ‘It appears the RICS underestimated both the scale of the problem and the industry’s willingness to tackle the shortcomings,’ says the report.

   Morgan is more optimistic. Improvements in the Real Service index are a lead indicator showing how landlords are pouring resources into improvements, he says. These will come through quickly as the rest of the industry follows.  Barrass sponsors the Loughborough study, so it is natural that he is more in tune with its pessimism.  The RICS must take a much stronger role and give the code teeth, he says. ‘Tenants are looking for reforms. No-one seems to realise the scale of change required and the money that must go into a huge amount of retraining. The RICS should be taking on this task,’ he says.

     If it does not, the matter could be taken out of its hands. Occupiers will become even more demanding about service charges as recession bites and appeal to a government desperate to curry favour with business voters. The property industry could again fall foul of legislation imposing radical changes.

  RICS CODE REQUIREMENT                                                       Actual 1998 -2006

Budgets delivered one month prior to the start of the year                        4%

Certificates delivered within 4 months of the end of the year                    21%

Management fees a fixed cost                                                                     22%

Interest credited to service charge accounts                                              13%

Clear apportionment basis                                                                            79%

Standard cost headings limited to 22                                                            2,341

Budgets within 2% of actual costs                                                                15%

Source: The Reality of Service Charges 1998-2007 – Dr John R Calvert, Loughborough University Business School