The RICS has now launched their Code of Practice for Service Charges in Commercial Property. The Code, which is based on the second edition of "Service Charges in Commercial Property: A Guide to Good Practice" will apply to service charges created from 1 April 2007. Like its predecessor, the Code only applies to England and Wales. Landlords with UK-wide property interests and who embrace the tenets of the code for their properties south of the border, are likely to be more inclined to apply similar principles to their property interests in Scotland, and owners of Scottish property are free to use the Code's principles as they see fit.
What is the likely effect of the introduction of this Code?
The RICS recognises the difficulties inherent in bringing about change, not least because no landlord will welcome more than one system of service charge in operation at one time. However, bearing in mind the number of disputes between landlords and tenants in relation to service charges in leases, a guidance note such as the Code with the status it has, may be welcome in many situations. The reasonableness of its guidance on best practice as agreed among those in the property industry is likely to become a useful point of reference.
The Code does not operate retrospectively and does not have legal status. Accordingly, for existing leases, where there is a need to interpret service charge provisions in a lease, agents and lawyers are advised to do so in a way that is consistent with the principles of the Code. As regards such provisions in new leases and lease renewals, it is recommended that the objectives of the Code be met.
It is important to remember that the Code is mainly drafted for the benefit of larger commercial lease transactions and the guidance contained in the Code may not therefore be appropriate for smaller lease transactions.
What are the consequences for not following the Code recommendations?
Compliance with the Code is not compulsory. It is accepted that it will not apply in all circumstances. However, if there is a dispute on service charge provisions, the court is likely to look to the Code for guidance in ascertaining best practice. The onus would be on the party not following the Code to explain the reasons for this.
The Code also advises following the recommendations to ensure that there is no scope for allegations of professional negligence. Every case would be resolved in its facts and not the guidance from the code alone but the Code expresses that it be used to assess the reasonable competence.
What are the main areas provided for in the Code?
The emphasis is on communication, transparency of costs and the "not for profit, not for loss" principles. Specific examples from the code are as follows:-
The Code requires landlords to communicate better with tenants in relation to the provision of services. This extends to communication in relation to the management of executing any works as well as the quality and standards of the works carried out. It is also the case that landlords are encouraged to promote discussions relating to the spending of service charge monies with tenants.
Landlords are also required to submit certified accounts in a timely manner to the tenant and in any event within four months of the end of the service charge year. Current statistics gathered prior to the drafting of the Code have shown that over 43% of the landlords send accounts at the end of the following year and in 12% the accounts are received 20 months late.
It is recommended that tenants receive a note of the service charge budget for the forthcoming year one month prior to the start of the service charge year. Current research shows 72% of budgets are received during the year and 2% of service charge budgets are issued after the service charge year has ended.
Challenge of service charge
The Code requires a reasonable right for each occupier to challenge the propriety of expenditure. The Code suggests a period of up to four months after issue of the certificate for challenge and further suggests alternative dispute resolution as the resolution procedure. At present most leases do not invite the tenant to challenge service charges. Indeed, many are drafted such as to rule out a challenge at the end of the service charge year save in cases of manifest error in the calculation of the service charge certificate.
The Code specifically discourages a fixed percentage management fee being charged, which is regarded as being potentially a conflict of interest and a disincentive to delivery of value for money. If a fixed fee is required, the Code suggests a fixed fee for a reasonable period of time (e.g. three years) subject to index-linked increases.
Interest on service charge monies
The Code requires interest earned on service charge monies paid in advance to be credited to the service charge account. Only a very small percentage of service charge certificates declare interest earned at present.