The revised Code will come into effect on 1 October 2011 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 “communication, transparency and timeliness.”

The Code 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; and to provide guidance to solicitors, landlords, tenants and managers in negotiating, drafting, interpreting and operating leases in accordance with best practice.

IS THE CODE BINDING? The guidance notes rightly acknowledge 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 and the parties are asked to “carefully consider the principles and requirements of the Code prior to entering into a new or renewal lease.” Whilst the Code may not be legally binding it seeks to establish an industry standard which may well provide the yardstick for best practice in service charge disputes.

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, alternatively they could be used as a reference point when trying to decide whether drafting is sufficiently Code compliant.

There is a lot of useful information in the Code itself and the full detail can be downloaded from the RICS website or from www.servicechargecode.co.uk.  

THE VERDICT The basis for the Code is a good one. Service charge regimes should exist to ensure that properties with shared facilities are properly operated and maintained for the benefit of all users and should represent good value for money. Service charges should not be a method by which landlords can extract additional “rent” from their tenants and they should not contain any hidden surprises for the tenants who are obliged to pay them.

In particular the Code seeks to address the concerns raised by Jonathan Gaunt QC sitting as a Deputy Judge of the High Court in Princes House Ltd v Distinctive Clubs Ltd. 1 That case was a lesson in “worst practice” for landlords and their managing agents and comprised (in the words of Gaunt):  

“first, a managing agent who did not regard it as part of his job to read the lease or give any consideration to whether the items, a contribution to the cost of which he was invoicing, properly fell within the service charge; secondly, a landlord who, despite earlier misgivings, appears to have decided to include all the costs of his project in the claim for service charges irrespective of the propriety of doing so, placing on his tenants the onus of challenging his demands if they were able to discover and disentangle the calculations on which they had been based; thirdly, a situation where the tenant had been led to expect a certain level of charge and then found himself being charged four times as much with no explanation being offered as to how this state of affairs had come about; leading, fourthly, to the tenant becoming so frustrated and alarmed that he dug in his heels, refused to pay and resolved to take every point going, good or bad, with a view to resisting what he regarded as his landlord’s patently unjustified behaviour.”

Unfortunately (although rare) such behaviour by landlords and managing agents has led to many tenants viewing service charge regimes with deep mistrust.

Whether the Code will make more impact in the property industry than the first edition will depend on the extent to which it is embraced by landlords. The Code has already faced allegations that it is too “tenant friendly”. There is a long list of dictates to landlords whilst the tenants’ obligations essentially amount to paying promptly and not witholding undisputed amounts, both of which feel like a sop to landlords who have complained that tenants frequently dispute service charge items with no good justification. Some of the time constraints recommended by the Code for reconciling accounts may also be impracticable for many properties, a point highlighted by The City of London Law Society in the drafting notes to their suggested clauses.

Ultimately it may be that, like The Code for Leasing Business Premises in England and Wales, the Service Charge Code will be adopted in part by the larger institutional landlords but ignored by smaller landlords without a meaningful stake in the property industry. All landlords, however, should be conscious of the very real possibility that legislation may follow where recommendations are not adopted. Even if it doesn’t, the courts may use the Code as a yardstick for good practice. Ignore the Code at your peril!

To see The Code - 26 Core Principles click here.

1 [2006] All ER (D) 117.