The Royal Institute of Chartered Surveyors (RICS) has published a new professional statement: Service Charges in Commercial Property (First Edition). The professional statement will supersede the previous editions of the service charge code, which were published as codes of practice, and will be effective from 1 April 2019.
The professional statement sets out best practice in the management and administration of service charges in commercial property, and for the first time provides mandatory obligations for RICS members and RICS regulated firms as well as expanded practice recommendations.
Aims and Objectives The professional statement sets out four aims and objectives.
- 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 provide guidance on resolution.
- Provide guidance to solicitors, their clients (whether owners or occupiers) and managers of service charges in the negotiation, drafting, interpretation and operation of leases, in accordance with best practice.
Mandatory Requirements Professionals involved in the management of service charge accounts must act in accordance with the following nine principles:
- Expenditure: All expenditure that landlords seek to recover must be in accordance with the terms of the lease.
- Proper and actual costs: No more than 100% of the proper and actual costs of the provision or supply of the services may be recovered (unless the amount or percentage of service charge payable by the occupier is fixed at the time the lease is granted).
- Budgets: Service charge budgets, including appropriate explanatory commentary, must be issued annually to all tenants.
- Accounts: An approved set of service charge accounts showing a true and accurate record of the actual expenditure constituting the service charge must be provided annually to all tenants.
- Apportionment: A service charge apportionment matrix for their property must be provided annually to all tenants.
- Accounts: Service charge monies (including reserve and sinking funds) must be held in one or more discrete bank accounts.
- Interest: Interest earned on service charge accounts must be credited to the service charge account after appropriate deductions have been made.
- Disputes: Where acting on behalf of a tenant, practitioners must advise their client that, if a dispute exists, any service charge payment withheld by the tenant should reflect the actual sums in dispute.
- Adjustments: When acting on behalf of a landlord, practitioners must advise their clients that following resolution of a dispute, any service charge that has been raised incorrectly should be adjusted to reflect the error without undue delay.
The professional statement also includes twenty four core principles which underpin and support the nine mandatory requirements. These are in turn supported by the best practice principles set out in the professional statement. Notable core principles include:
- Service costs: All costs should be transparent so that all parties are aware of how the costs are made up. Management fees should be on a fixed-price basis. Services should be provided on an appropriate value for money basis and owners should not benefit from the provision of services. Save for a reasonable commercial management fee that reflects the actual costs of managing the services, the amount an owner may recover is limited to the actual and proper cost incurred in providing the services.
- Allocation and apportionments: The basis and method of apportionment should be demonstrably fair and reasonable to ensure that occupiers bear an appropriate proportion of the total expenditure that clearly reflects the availability, benefit and use of services.
- Communication and consultation: Managers should consult with occupiers regarding the standard and quality of the service charge provision and communicate with occupiers to ensure services are delivered effectively for the benefit of all. This will help occupiers understand what they can expect to receive and how much they are required to pay.
- Financial competence: When issuing statements of accounts and/or certifying expenditure, managers should do so in a non-partisan spirit, acting as experts.
- Occupier responsibilities: Occupiers should ensure prompt payment of all on-account service charges and balancing payments and recognise that value for money and standards will be enhanced through partnership between owner and occupier.
- Alternative dispute resolution: All new leases (including renewals) should make provision for either party to require the resolution of disagreements through alternative dispute resolution as an alternative to court action.
- Timeliness: Communication between owner and occupier should be timely and regular. In particular: service charge budgets should be issued at least one month before the start of the service charge year and detailed statements of actual expenditure should be issued within four months of the service charge year-end.
- Transparency: Prompt notification of variances to forecasts is encouraged to ensure better working relationships between owner, manager and occupier.
- Value for money: Service charge costs should be appropriate to the location, use and character of the property with value for money achieved at all times (rather than provision of services at the lowest price).
- Exclusions: A service charge should not include any of the following:
- Initial costs incurred in relation to the design and construction of the premises or any future redevelopment costs.
- Improvement costs above the costs of normal maintenance, repair or replacement. Enhancement of the fabric or plant may however be permitted if it can be justified on a cost-benefit analysis.
- Costs and fees relating to the owner’s investment interest. This includes rent collection, the cost of letting units, the cost of enforcing lease covenants and dealing with consents/rent reviews and any costs attributable to void premises and the owner’s own use of the property.
RICS have stated that there will now be legal and/or disciplinary consequences for failure to comply with the professional statement. They accept that some of the core principles will be difficult to quantify and in some (rare) circumstances compliance will not be possible. In such circumstances, RICS may require the member to justify their decisions and actions.
Interaction with leases
Existing leases: The professional statement will not override the terms of an existing lease and failure to comply with the principles contained in the professional statement will not be sufficient to negate or limit a tenant's liability to pay a service charge due under the lease. However, RICS suggest that the terms of the lease should be read in conjunction with the professional statement and that existing service charge clauses should be interpreted so far as possible in line with the principles set out in the professional statement unless the lease specifically stipulates a different approach.
New leases: As with existing leases, the professional statement will not override the terms of a new lease. It is, of course, anticipated that the professional statement will influence the negotiation and drafting of service charge clauses in new leases, including lease renewals. The professional statement recognises the risk that this may result in a "dual" service charge where leases of part of a multi let building are renewed on the basis of the new requirements and recognises that it may be appropriate in such cases to include interim provisions until a "tipping point" is reached at which point the owner may swap from the old lease service charge regime to the new.
Sweeper clauses: It is not uncommon for a lease to include a "sweeper" clause to avoid the risk of the owner incurring costs that may fall outside of the listed services. The professional statement makes it clear that such clauses should not be used to cover the cost of something that was left out of the lease in error but should, instead, be seen as giving the owner the ability to provide further services not identified or contemplated at the time the lease was granted but later considered necessary.
The professional statement will be effective from 1 April 2019. This will give landlords and managing agents some time to become familiar with the mandatory requirements and core principles prior to implementation.
The professional statement can be viewed in full here.