The rise in energy costs, in some cases as high 600% on the previous year, is affecting everybody including commercial office occupiers where the increase in reflected in service charge and metered electricity bills. The uplifts are often invoiced in arrears unlike service charge costs, which are usually invoiced in advance and reconciled upon certification of the year end actual expenditure.
Service charge budgets have generally anticipated a cliff edge in April 2023 as the Government Energy Bill Relief Scheme was due to end and costs return to their uncapped levels. To avoid a significant impact for businesses the Government has now announced its Energy Bill Discount Scheme is to be extended to April 2024. This has led to service charge budgets being reassessed.
REASSESSING SERVICE CHARGES
The impact of hybrid working patterns is likely to be the biggest disruptor to established service charge principles, particularly regarding energy usage. Comparing consumption data to highlight the shift in usage over the last few years will better reflect the change in the way offices are now being used. DeVono believe that some service charge budgets are being set pessimistically high, anticipating increases within 2023 and forecasting a worst-case scenario. Most leases permit landlords to set service charge budgets at their own discretion, making allowances for anticipated expenditure even at significantly increased levels. Tenants would be expected to pay the prescribed level of service charge throughout the year and await a credit for any overpaid amounts after the year-end accounts are certified. This can be about 18 months after the initial payment has been made. As businesses face greater inflationary pressures, this is not an ideal situation and needs to change.
In the spirit of transparency as advocated by the RICS service charge code, landlords should be willing to provide a rationale for significantly increased expenditure and, if requested, provide some backup information or calculations to justify what may seem like excessive budget allowances.
This is a fast-changing cost category influenced by several factors, including supply issues due to the conflict in Ukraine, rebound in post-covid prices as well as various Government interventions. It is worth noting that cost increases are not being seen to the same extent across the board as some landlords have managed to procure energy at preferential rates by signing up to long-term fixed tariff deals with energy suppliers before the uplift. Some tariff rates are still being charged at around 18p per kwh compared to some at the other extreme at around £1 per kwh. We expect the large variation of costs to narrow as the low-cost fixed-rate deals come to an end and the market stabilises.
WHAT COULD LANDLORDS DO TO PROVIDE BEST VALUE?
Landlords should be regularly retendering or testing the market for better service contracts. They should be ensuring that energy is purchased at a competitive rate. At present there are few energy suppliers offering low tariff deals, particularly at fixed rates. As an exception to this, we have seen some forward-thinking landlord’s handover the procurement of energy to tenants who have a large property portfolio and use this to their advantage by obtaining a better deal.
Working together with landlords, tenants can drive greater value by actively participating in initiatives to reduce energy consumption, such as reporting fluctuations in patterns of occupation so that plant running times can be modified accordingly or exploring the use of solar panels and other energy-saving equipment, designed to reduce consumption.
Tenants should check how the metering of electricity is carried out at their building and/or their office. This ensures that any efforts to reduce electricity consumption are noted and highlighted in their usage/costs. Whilst the onus is on the landlord to procure energy as competitively as possible, the tenant is entitled to ask what the rate per KWH tariffs for electricity and gas tariffs are, whether the landlord is on a fixed deal and when this ends. Understanding all aspects of energy consumption will be to the benefit of both tenant and landlord.
Often the simplest options are best, so ensuring that the lights are on Passive Infrared Sensors (PIR) or turned off when the last person leaves can make a difference without requiring the installation of expensive lighting control systems.
Now that most office users work from laptops rather than desktop PCs, monitors are more energy efficient, office lighting tends to be mostly LED, the majority of demised electricity is consumed by additional cooling of server rooms and powering server racks. Tenants should assess what savings could be made by checking server room temperatures and ensuring that energy is not wasted cooling server rooms lower than necessary.
At Devono, we offer a free service charges and energy costs audit to assess whether there are opportunities to reduce the energy charges or other costs incurred in running and maintaining buildings, as well as being able to assess the sustainability of a building that can feed into your own ESG monitoring and reporting requirements.