In September 2018, the Royal Institution of Chartered Surveyors (RICS) published a professional statement entitled ‘Service charges in commercial property, 1st edition’.
The statement is intended to set a marker for the standards of management required in commercial property leases. It provides mandatory obligations that RICS members and RICS regulated firms must comply with.
The statement will become effective from 1 April 2019 in the UK and will replace the current third edition of ‘the RICS Code of Practice: Service charges in Commercial Property’.
What is RICS?
RICS is a professional body, which attempts to deliver a single, international standard in the valuation, management and development of land, real estate, construction and infrastructure. It has a very strong international presence with headquarters in London.
What is a service charge?
A service charge is a sum of money paid by tenants to the landlord or the management company for the services the landlord or the management company provides. Services provided depend on the property but these may include repairs, maintenance, heating, lighting, insurance costs, staffing to the building and common parts. Service charge provisions are usually drafted in such a way that allows the landlord to charge separately from the rent.
For residential property, service charges are subject to comprehensive legislation. Commercial property leases, however, do not have any legislative control and can be freely negotiated. To provide some guidance, RICS provides a voluntary code of practice, which will now be replaced by the statement.
What does the statement say?
The statement provides mandatory obligations, core principles and best practice recommendations that RICS members and firms regulated by RICS must comply with. If members depart from the best practice recommendations set out in the statement, they should only do so for justifiable reasons. RICS states that it is not acceptable to simply comply with the mandatory obligations and ignore the core principles and the best practice recommendations. The statement does not, however, override the terms of an existing lease.
The statement seeks to:
- improve general standards and promote best practice, uniformity, fairness and transparency in the management and administration of services charges in commercial property;
- ensure timely issue of budgets and year-end certificates;
- reduce the causes of disputes, and to provide guidance on the resolution of disputes if these arise; and
- provide guidance to solicitors, their clients (whether owners or occupiers) and managers of service charges.
There are nine mandatory requirements that according to RICS represent to be an acceptable standard of performance for RICS members and regulated firms. Some of the examples of the requirements are:
- All expenditure that the owner and manager seek to recover must be in accordance with the terms of the lease.
- Subject to section 4.2.7 of the Statement, owners and managers must seek to recover no more than 100% of the proper and actual costs of the provision or supply of the services (note: section 4.2.7 of the Best practice to support the core principle states that in some cases the overall service charge costs may be fixed and may be greater than 100% of the actual cost).
- Owners and managers must ensure that service charge budgets, including appropriate explanatory commentary, are issued annually to all tenants.
- Where acting on behalf of a tenant, practitioners must advise their clients that if a dispute exists, any service charge payment withheld by the tenant should reflect only the actual sums in dispute.
The core principles
The mandatory obligations are supported by 24 core principles. They deal with:
- The service costs
- Allocation and apportionments
- Communication and consultation
- Financial competence
- Occupier responsibilities
- Right to challenge/alternative dispute resolution (ADR)
- Value for money
RICS acknowledges that some of the principles may be difficult to quantify and in rare circumstances, strict compliance may not be always possible. The appropriate level of compliance may be based on professional judgement as to what is appropriate and reasonable in the circumstances.
Best practice to support the core principles
Best practice recommendations help RICS members and regulated firms achieve mandatory requirements. RICS states that the extent to which owners and managers should seek to comply with the recommended best practice procedures will often depend on a variety of issues, such as the size, nature and type of property, the aggregate of the total service charge costs and the amounts payable by occupiers. Nevertheless, any departure from these recommendations is permitted only if it is justifiable to do so. Otherwise, RICS expects its members and regulated firms to comply with them.
What does this mean?
The new professional statement is an important step towards a fairer, more modern and flexible approach to property management. RICS states that there may be legal and/or disciplinary consequences for members in departing from the Statement, which may lead to a finding of negligence against a surveyor.
Currently, the majority of commercial leases do not refer to the ‘old’ RICS Code as landlords rarely wish to have to comply with a code that is not mandatory. The mandatory nature of the statement, however, will mean that any RICS surveyors will have to comply with the statement and will have to interpret the lease in such a way that does not depart from the obligations, principles and best practice recommendations. This may also mean that tenants will be pushing landlords to refer to the statement when negotiating leases.
On the other hand, as the statement does not override the terms of existing leases and as landlords are not required to instruct surveyors who are regulated by RICS, the change will most likely be slow and gradual.