Retail centres and offices failing on service charge compliance standards

Service charge accounting standards and transparency must improve for retail parks, shopping centres and offices to avoid facing “statutory legislation”, according to research from Bellrock Real Estate. Bellrock’s latest Service Charge Operating Report found that less than a fifth of documents for a sample of the UK’s biggest retail parks fully complied with all 16 compliance metrics in the RICS Professional Standard. Just under 80% complied with 10 or more metrics, while a little over 86% complied with eight or more. Only 8.6% complied with four or fewer, and none failed outright. For multi-let offices, just 4.6% of documents fully complied with all 16 requirements, while 6.2% failed to comply with any. In shopping centres, 7.1% of documents complied with all standards, and all complied with at least three.   Shared shortcomings The findings showed all three sectors need improvement. Researchers said this was especially evident for one metric stipulating that accounts should be supported by an independent review in line with Institute of Chartered Accountants in England and Wales guidance. Compliance with this metric stood at 58.5% for offices, 60.3% at retail parks and 76.2% in shopping centres. Independent accounting reports for retail parks, shopping centres and offices, amounting to 11.4%, 12.5%, and 23.7% of each sector respectively, included qualified opinions for accounting errors that related to the inclusion of “inappropriately accrued expenditure” for works not conducted during the relevant accounting period. The report said the figures underlined a “growing issue that must be addressed by the UK accounting profession and/or the RICS” to “eliminate the practice or provide guidance on how to correct such accounting deficiencies in a transparent manner that does not financially disadvantage tenants”. Areas of improvement Categories that needed the most improvement across all three sectors were: The timely delivery of annual service charge accounts Providing a certifying statement that the amounts seeking to be recovered are in accordance with the lease A statement on how insurance claims are accounted for Supporting the accounts by including an independent review in line with ICAEW guidance A correct understanding of accrual accounting and its application; Improvements in the management, administration and reporting of funds. The report’s authors said they were encouraged to see some managing parties are “trying hard” to improve the relevance, representational accuracy and comparability of information in service charge accounts. However, they emphasised that further work is needed to meet the mandatory and “best practice” requirements set out in the RICS Professional Standard. Accounting issues In its most recent service charge analysis, Bellrock Real Estate head of occupier services Russell Heath described an instance in which a five-figure sum for replacing an item was included in an unnamed retail park’s financial records. After asking the agent for the park, it emerged the item was damaged, but no associated insurance claims appeared to have been filed. “This has now been resolved but, to my mind, it raises broader questions – was this an oversight, down to inexperience, or the result of something potentially far more worrying?” said Heath. “After all, this is not the first time that I have encountered this type of issue. “Whatever the reason, it highlights the need for greater transparency and for a duty of care to be extended to occupiers. In this instance, no supporting commentary had been provided and none of the issues could have been identified from the statement of service charge expenditure prepared by the managing, or should I say, landlord’s agent.” For Heath, the issue “highlights that we have further work to do as an industry if we are to protect occupiers and avoid statutory legislation”. Tackling compliance challenges Heath said the research showed that compliance “continues to represent something of a challenge to the industry”. He said: “I would encourage the RICS to seize the initiative in the forthcoming edition of the RICS Professional Standard by taking further positive steps to support greater transparency and compliance.” Bellrock head of real estate at Andrew Morley said: “In practice, it is clear to me that there are significant aspects of property management that need to be improved and other developing trends that are contrary to the key objectives of the [professional] standard. “However, I remain hopeful that the next iteration of the standard will move things forward and all stakeholders will embrace it with good intent.” See also: Shopping centres falling short on service charge compliance