The new Professional Statement for Commercial Service Charges will be effective from 1st April 2019 and supersedes the 3rd edition of the RICS Code of Practice.
Although we have seen many of the provisions before, there are instances where best practice has been ignored, and it is the first time they have been made mandatory for RICS surveyors and other regulated professionals.
What is the aim?
RICS has collaborated with major property and professional bodies, representing owners, occupiers, managing agents, solicitors and accountants to achieve balanced requirements.
RICS has stated the aims and objectives of the professional statement to be:
• improve standards and promote best practice, uniformity, fairness and transparency
• ensure budgets and year-end certificates are used in a timely manner
• reduce the causes of disputes and provide guidance on resolution
• provide guidance to solicitors, their clients and managers of service charges
What are the key changes?
There are nine mandatory requirements:
1. All expenditure that the owner and manager seek to recover must be in accordance with the terms of the lease
2. Owners and managers must seek to recover no more than 100 per cent of the proper and actual costs of the provision or supply of the services
3. Owners and managers must ensure that service charge budgets and explanatory commentary are issued annually to all tenants
4. Owners and managers must ensure that an approved set of service charge accounts is provided annually to all tenants
5. Owners and managers must ensure that a service charge apportionment matrix is also provided annually
6. Service charge monies must be held in one or more discrete bank accounts
7. Interest earned on a service charge account must be credited to the account
8. When 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
9. When acting on behalf of a landlord, practitioners must advise their clients that, following a resolution of a dispute, any service charge that has been raised incorrectly should be adjusted to reflect the error without undue delay
These are underpinned by core principles.
Some of these should be non-contentious for example, owners should not profit from the provision or supply of the services save for a reasonable commercial management fee.
It is usual already for leases to provide for budgets and end of year accounts and to set out procedures regarding the preparation of the service charge accounts. However, it is essential these requirements in the lease are duly followed in practice. The requirement for owners to share information with occupiers will come as a welcome addition to occupiers.
The professional statement is clearer than the previous code in that it provides that a sweeper clause cannot be used to cover the cost of something that was left out of the lease in error. Service costs are to be made clear and obvious to tenants at the outset. The intention of sweeper clauses is to give the owner the ability to provide further services that are not identified or in contemplation at the time the lease was granted, and that, for any reason, are considered necessary or desirable to be provided at a later time.
It also definitively states that the cost of obtaining an EPC should not normally be put through the service charge. Whether or not energy saving improvements to the building can be recharged would depend on the drafting of the lease.
To ensure transparency management fees are to be set on a fixed-price basis (subject to annual review or indexation) rather than being calculated as a percentage of expenditure.
How will it apply?
There may be legal and/or disciplinary consequences for non-compliance with the mandatory requirements. However non-compliance will not negate or limit an occupier’s liability in respect of the service charge provisions in the lease.
There are also some best practice requirements, but departure from these should only be done in justifiable circumstances taking into account proportionality, which will depend upon a variety of factors: size, nature and type of property, the aggregate of the total service charge costs and the amounts payable by individual occupiers.
The professional statement does not override the terms of a lease, but is a tool for interpretation and will no doubt influence future lease drafting.
The increased regulatory impact ought to prompt all parties to give careful consideration to the core principles, mandatory requirements and best practice.