THE NEW CODE

On 4 May the RICS launched the second edition of its Service Charges in Commercial Property Code of Practice. The revised Code will come into effect on 1 October and replaces the first edition of the Code originally published in 2007. Like the original Code, the new version seeks to set out a framework of best practice for owners and management surveyors and states that its core principles remain as "communication, transparency and timeliness".

Those responsible for preparing the new Code have a wealth of experience in the industry. The main author is Peter Forrester, who is a director and head of service charge consultancy at Savills. He is well known for advocating best practice in the management and administration of service charges. His co-author and the Chair of the Pan Industry Service Charge Code Steering Group, is Chris Edwards of Commercial Property Advisors Ltd. Chris is also the Chairman of the RICS Service Charge working group and the RICS Commercial Market Board. Behind them was a Pan Industry Group representing landlords, tenants, surveyors and other service charge advisors and interested parties.

The object of the working group was not materially to change the principles behind the original Code, but to present it in a clearer format and to build on the experience gained from working with the Code over the last four years. One of the main complaints about the original Code was that, as it had 86 separate points of principle set out across ten pages of text which went into detailed points of practice, it was too cumbersome for practitioners to pick out the key issues. The new Code, by contrast, has just 26 points of principle and has been condensed into two and a half pages. Much of what was previously in the Code itself has now been moved into a separate section of the Code booklet which sets out the principles of best practice in detail. This replaces the previous section entitled "Technical Support". The new Code also includes a useful checklist for practitioners, a list of cost classifications and some sample reports for practitioners to use.

PREAMBLE TO THE CODE

Although the Code itself is now only two and a half pages long, the booklet containing it still runs to some 79 pages. It starts with a Foreword setting out the context for the second edition. One comment that will interest readers is a statement that "increased engagement with the legal profession is a key aspiration of the new Code". There is clearly a hope that practitioners will draft new leases to reflect the best practice set out in the Code.

Another key point made both in the Foreword and elsewhere in the Code, is the need for occupiers to be able to challenge service charge costs. The Code recommends that all leases should contain alternative dispute resolution clauses. This is in line with many aspects of the Code, which are aimed at cost efficiencies. My experience is that owners are increasingly regarding ADR as a sensible way of dealing with service charge disputes. Most owners would not, however, want to exclude the ability to resolve an issue in Court, if the issue in question merited judicial consideration.

A further point which the Foreword highlights is the use of Industry Standard Cost Classifications. These were introduced in the original Code and are increasingly used by owners. The new Code however places greater emphasis on their use, regarding adoption "as a must in services charges going forward". For lawyers drafting leases however, the cost classifications are not necessarily a user friendly way of setting out the list of services to be provided and there is no reason why they need slavishly to be followed, so long as the principles of the cost headings are followed. The list of costs is, however, a useful checklist for draftsmen.

Following on from the Foreword are the guidance notes which clarify that the status of the Code is that of a guidance note and that the recommendations set out are intended to embody best practice. The notes acknowledge that in some cases the advice set out in the Code may not be appropriate, but asks that managers be transparent in their departures from the Code. There is a cautionary note that whilst practitioners who do not follow the Code will not necessarily be negligent, the best practice set out in the Code may well be used as a benchmark in deciding on whether a professional has acted appropriately and competently.

There then follows a further "Introduction" which sets out the purpose of service charge provisions and includes the list of the items which should not be included as service charge costs. These were previously set out at Article 29 of the original Code and encompass the issues which most practitioners would now expect not to be included in the service charge costs, such as initial cost of construction, the cost of improvements above normal repair and maintenance or replacement, future development costs, cost of rent collection, enforcement of covenants and other matters which should be charged to individual tenants; and any costs associated with the failure of the owner or manager to perform its obligations.

The Code itself is prefaced by a statement of aims and objectives, which are:

  • To improve general standards and promote best practice, uniformity, fairness and transparency.
  • To ensure the timely issue of budgets and year end certificates.
  • To reduce disputes and provide guidance on resolving them.
  • To provide guidance to solicitors, landlords, tenants and managers in negotiating, drafting, interpreting and operating leases in accordance with best practice.

THE CODE

The core principles begin with a quotation from Jonathan Gaunt QC sitting as a deputy high course judge in Princes House Limited v Distinctive Clubs Limited [2006]:

"Tenants who agree to service charge clauses under which they contract to pay against a surveyor's estimate or an accountant's certificate rely upon the professional people involved performing their roles with professional scrupulousness, diligence, integrity and independence and not in a partisan spirit, supposing their only task to be to recover as much money as they can for the landlord."

So what are the 26 core principles in the Code?

Please click here to view table.

The core principles conclude with additional notes designed to encourage its use. This guidance rightly acknowledges that the Code cannot override existing lease terms, but encourages its use as a way of interpreting existing provisions. Occupiers and owners on lease renewals are encouraged to update service charge provisions to reflect the Code the parties are asked to "carefully consider the principles and requirements of the Code prior to entering into a new or renewal lease".

RECOMMENDED BEST PRACTICE

As mentioned earlier, the Code then sets out in some detail the recommended best practice to support those core principles. These again fall under a number of broad headings:

Please click here to view table.

DRAFT SERVICE CHARGE PROVISIONS

In order to support the Code, the City of London Law Society, in consultation with the authors of the Code, has produced draft service charge provisions for offices and for shopping centres which reflect the Code's core principles and follow much of the detailed advice in the best practice guidance. They can be downloaded from the City of London Law Society website: www.citysolicitors.org.uk . These clauses also include detailed sinking fund provisions as an optional extra. Whilst practitioners could use the provisions in their entirety, they could easily be used instead by draftsmen as a reference point when trying to decide whether their own drafting is sufficiently Code compliant.

There is much useful information in the Code itself and anyone interested in looking at the full detail of it can download it from the RICS website or from www.servicechargecode.co.uk.

This article first appeared in issue 270 of the Property Law Journal, published by Legalease Ltd.