New year, new Service Charge Code. The Royal Institution of Chartered Surveyors (RICS) will be publishing a revised edition of the Code of Practice on Service Charges in commercial property (the Code) later this year. At this stage a consultation draft of the proposed revised edition has been issued and the RICS invited comments on this draft by 21 January 2011. The purpose of the revision is to take on board criticism of the existing 2006 Code which is designed primarily for larger properties.
Much of the existing Code will remain unchanged. The most significant and practical proposed changes to the 'Core Principles' of the Code are set out below.
The 2011 Code introduces the requirement that services should now represent 'appropriate' value for money. Although the term 'appropriate' is not defined, the 2011 Code recommends that services are appropriate to the location, use and character of the property. The 2011 Code goes on to require that competitive quotes are obtained or that costs are benchmarked.
A key principle of the 2011 Code is that property owners should not profit from the supply of services. This means that the amount recovered by an owner is limited to the proper and actual cost incurred in the provision or supply of services.
In addition, the 2011 Code imposes the following practical changes in relation to the service charge report:
- it should include details of the terms of the management contract and state whether it was competitively tendered; and
- it should include an apportionment schedule and any new leases should be drafted so as to allow future flexibility over the method of apportionment.
The main change in the 2011 Code is the suggestion that managers of commercial premises consult occupiers about the level of services that are appropriate, even if the lease is silent on this. In addition, the owner or manager of the property needs to set out clear policies as to how the service charge will be managed.
The 2011 Code also requires timely and regular communication and consultation between managers and occupiers to encourage good working relationships and understanding with regard to the provision and cost of services. It recommends that managers issue budgets to occupiers at least one month prior to the start of the service charge year and issue detailed statements of actual expenditure together with accounting policies and explanatory text within four months of the service charge year end.
New leases and lease renewals
Notwithstanding the O'May principles, the 2011 Code recommends that owners, occupiers and solicitors ensure that any lease renewal under the 1954 Act reflects the 2011 Code.
Financial controls and competencies
The 2011 Code sets out the auditing standards to be observed in preparing service charge accounts and requires that an auditing professional is used to prepare the accounts. Compliance with this standard may affect the cost of management.
The 2011 Code also introduces an obligation on managers, when issuing accounts or certifying expenditure, to act in a non-partisan spirit. Owners and managers are to operate separate interest bearing accounts for occupier on-account payments and all interest earned will be credited to the service charge account.
There is now also an obligation to use the industry standard cost headings in the accounts and reports. The 2006 Code only advised that these cost headings be used.
The 2011 Code recommends that all leases provide for the use of Alternative Dispute Resolution (ADR) to settle disputes relating to the service charge. The 2011 Code also encourages the parties to choose ADR even if the lease does not require them to do so.
This is brand new. The 2011 Code makes reference to new 'Green Clauses' that are being included in many new leases to deal with sustainability issues. The 2011 Code:
- advocates that sustainability and improved environmental performance should be taken into account when carrying out any cost-benefit analysis of improvement costs above the normal costs of repair;
- requires a fair and reasonable approach to apportioning the costs of works that improve the environmental performance of the property or its sustainability;
- permits restrictions on work that adversely affects environmental performance of the property. This could restrict the services provided or repairs carried out and could equally apply to alterations that any occupier proposes.
However, having made reference to sustainability, the draft Code gives little guidance as to what to do other than to create a talking shop.
The new draft refers to mixed use schemes. A different code applies to residential leases and mixed use schemes are increasingly common but the 2011 Code falls short of reconciling the two schemes.
The 2011 Code aims to improve general standards and promote best practice, uniformity, fairness and transparency in the management and administration of service charges in commercial property. It also seeks to reduce the causes of disputes and give guidance on resolving disputes. However, the language of the 2011 Code is often ambiguous with no definition given for some of the key terms, which may defeat many of its main objectives.
Only time will tell whether the cost of implementing a process which requires 'best practice' will in the long run prove more costly than a 'quick and dirty' solution.