Property auditing is becoming increasingly vital for retailers as they seek to claw back tens of millions of pounds lost in leasing errors and miscalculations, reports Matthew Valentine.

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Retailers could be paying higher property costs than they should be for one store in every 10 because of errors in the administration of complicated leases, according to retail property audit specialists who earn their living by clawing back overpayments.

And even those retailers that keep an eagle eye on the fine print of their leases could find they are entitled to refunds on local authority business rates because of miscalculations by councils.

Property costs have always loomed large for retailers. Now, with continued economic pressures and increased online competition, a growing number are realising that checking the fine print of leases can yield a pleasant surprise: a refund.

Put simply, errors creep into the administration of leases and service charge contracts. This leads to overpayments that are compounded over time. The problem is widespread, according to Mike Sheath, head of property at consultancy and brokerage group Capa, which offers a retail property audit service to uncover the mistakes. “90% of organisations incur billing errors and charging faults that can result in significant overpayments,” he says.

Capa has recovered £125m for clients over a decade of offering its auditing services, carrying out nearly 1,000 audits in that period.

“With property, all cost centres are looked at and each has its own particular minefield,” says Sheath. “Rates is a particularly large recovery area given the issues with due credits, due interest, errors in transitional calculations and so forth.”

Capa also reviews aspects such as insurance, utilities including network charges, and sub-tenants’ costs. “A property audit might yield on average £1,000 per store,” says Sheath, who provides ongoing support for retailers
or one-off health checks to ensure that property costs have not snowballed because of past errors.

Richard Clark, a chartered accountant at Wagner Accountants and a former director of Sir Tom Hunter’s West Coast Capital, specialises in retail rescue and reconstruction projects for companies that have enteredadministration. He says after speaking to banks and investors, commissioning a property audit is high on his to-do list for any company he becomes involved with. “It is almost like going to the doctor for a check-up. Without any shadow of a doubt it is a very wise thing to do,” he says of the ‘no-win, no fee’ audits.

Rates recovery

Fashion retailer Blue Inc was confident in the management of its leases, but brought Capa in to check carefully the level of rates being paid. “We have had success in rates recovery from local councils, especially following road improvement works and the like,” says Blue Inc chief executive Steven Cohen. “Capa challenges the veracity of the rates that the local council is charging and we have been working together to reduce our rates paid, which has been a significant opportunity. They have done very well.”

Trade can be easily disrupted by road improvement projects that restrict parking or access, or by other local building projects.

Retailers are also eligible for reduced rates if stores close temporarily for refurbishment. But, as may be expected, councils do not rush to compensate retailers for any inconvenience or loss of sales. Being represented by a third party when discussing a reduction in rates can be beneficial, says Cohen.

In all of these situations, particularly lease problems, human error is to blame for many of the mistakes. These have become more common as the economy has stagnated, says John Gray, senior partner at 1st Point Consulting, another group offering audit services.

“The industry is suffering from the same pressures everybody else is. Landlords, managing agents and retail clients are having their staff rolls shrunken. They are losing people, so things aren’t being done as well as they really ought to be,” says Gray. “Leases and service charge accounts are quite complicated and errors occur. Things like exclusions and caps get ignored and unless you do an audit you don’t pick those up. A lot of those charges could be levelled quite easily at the secondary and tertiary landlords, but some of the blue chip landlords are equally guilty of occasional lapses in concentration.”

Clark is in agreement: “You can be sure that companies have had to cut down on finance staff. And the checking becomes a quicker check.”

Gray gives a hypothetical example of a retailer with two units in one shopping centre, where a minor sub-clause in one lease says it should be added to the other lease for the purpose of weighting, generating an apportionment [the distribution of a benefit]. When the landlord or managing agent changes, such a clause can easily be overlooked.

“Picking that up saves the client the best part of £5,000 a year, and the lease goes back to 2009. So there is £25,000 of refund coming to them. Somebody has read the lease when they have set up the management of it and both leases look exactly the same, except for this little sub-clause that is not actually within the service charge schedule. But it is in the lease.”

Size matters

Gray calculates that the vast majority of leases are administered correctly, but that up to one in 10 throws up a problem that needs to be investigated. When errors are found the amount of overcharging involved tends to be related to the size of the unit. “If you are looking at a department store an error could mean £70,000 to £80,000 of credit to come back, whereas if you are looking after somebody with 1,500 sq ft, it could be £75,” he says.

Larger retailers may also be exposed to a greater likelihood of error, for a reason unrelated to the size of their properties: their leases tend to be more complicated.

“Bigger blue chip retailers invariably have the power to put in exclusions and service charge caps when the lease is being signed, and it is invariable these that get missed,” says Gray.

“That retailer may go into a shopping centre in 1999, then in 2002 the shopping centre is sold and somebody else begins to manage it, doesn’t read the lease sufficiently, and doesn’t apply the cap or the exclusion. Then somebody comes along in 2007 or 2013 and says ‘you haven’t been applying this cap’.”

Fortunately, when mistakes are identified and pointed out landlords respond promptly and professionally, say the auditors - even when substantial sums are involved.

However, they may do so through gritted teeth as more and more retailers raise questions, a trend that is unlikely to go away.

“The focus on cost is with us for good now, whether or not the economy picks up and people start making money again. We will continue to be busy,” says Gray.

Code of practice to resolve problems

The Royal Institution of Chartered Surveyors (RICS) concedes that issues such as poorly managed service charges can be a frequent cause of dispute between commercial landlords and tenants. It has worked with leading property groups to develop a code of practice to deal with such disputes.

This sets out best practice and seeks to promote uniformity, fairness and transparency in the management and administration of service charges. Where possible, it provides guidance on resolving disputes before they go to court. Ultimately, however, a lease constitutes a contract which takes precedence over the code if the interested parties choose to take matters further.