Commercial property practitioners and stakeholders have just under a week left to have their say on the draft text of the 4th edition of the RICS Code of Practice: Service Charges in Commercial Property (the “Code”), which is due to come into effect on 1 April 2018. This professional statement will replace the 3rd edition of the Code, which is the RICS’s current best practice guidance.
In this blog post we look at what the proposed changes are and how landlords will be affected.
What are the changes?
If adopted, the new edition will do more than simply update the guiding principles. Instead, it will impose a set of mandatory requirements for RICS members and regulated firms, aimed at making the management and administration of commercial service charges more transparent, equitable and consistent across the commercial property spectrum. The increase in regulation is designed to ensure tenants are provided with clear information upfront regarding how their service charge has been calculated, to protect them from “rogue” landlords and managing agents and to reduce the risk of service charge disputes. In this way, the RICS sees the proposed changes as beneficial to both landlord and tenant.
Nevertheless, landlords and their managing agents should be aware that the new edition could result in some significant existing guidelines becoming mandatory, including:
- Restrictions on the recovery of expenditure which is not specifically in accordance with the terms of the tenant’s lease;
- A limitation on recoverability to 100% of the actual cost of providing a service, unless the lease contains an express right to recover more;
- A requirement to hold service charge monies (including sinking/reserve funds) in a discrete bank account, with any interest earned credited to the account after deducting any bank charges and tax; and
- A requirement to supply each tenant with annual service charge budgets, signed statements of actual expenditure and details of apportionments between tenants.
There are best practice guidelines that accompany the Code. These encourage managing agents to act in a non-partisan manner and ensure the apportionment of service costs is transparent, demonstrably fair and reasonable and in line with clear policies. Tenants should be consulted on the standard and quality of services provided, and the focus should be on value for money rather than lowest cost in tender exercises. Parties are expected to be open to the use of alternative dispute resolution methods in resolving service charge disputes, and RICS members will be required to advise their clients that tenants should only withhold payment of an amount of service charge which reflects the actual sums in dispute.
It is worth noting that residential service charges are already subject to heavy statutory regulation and restrictions, most importantly by virtue of Landlord & Tenant Act 1985, sections 18-30. The draft 4th edition of the Code for Commercial Property borrows significantly from the themes that already apply to residential landlords and agents, including the requirements for separate accounts, the availability of budgets and statements of costs, and the availability of more in-depth information for tenants to review. What the Code does not do, however, is go so far as to promote pre-consultation (which is mandatory for residential major works and service contract appointments above a low threshold).
How will this affect landlords?
The draft Code may not in fact differ significantly from many landlords’ existing service charge practices. However, the shift from discretionary to mandatory requirements reflects a concerted effort by the RICS to create a more uniform system for commercial service charges and increase clarity and certainty for tenants. A landlord’s failure to follow the Code will not in itself absolve tenants of liability to pay service charge in accordance with their leases. Nevertheless, given the increased publicity and greater regulatory clout of the new edition, landlords and managing agents would be well advised carefully to examine their service charge accounting procedures and ensure they will be fully compliant from 1 April 2018, and to keep the mandatory principles and guidance in mind when negotiating service charge provisions in new leases. Although the potential legal and/or disciplinary consequences for failure to comply with the mandatory requirements are mentioned only in general rather than prescribed terms, given the binding status of RICS professional statements on their membership, landlords can expect their agents to be keen to ensure existing service charge regimes are fully in line with the Code as soon as possible to avoid any accusations of wilful departure from its provisions.
Tenants will be alive to the possibility that they may deploy the Code as a means of asserting that good practice has not been followed and that some element of service charge is not recoverable, or that the apportionment of charges is incorrect. The Code will not win them the point, but it may help them demonstrate that (say) an apportionment is not within the guidelines.
The draft 4th edition of the Code is open for consultation via the RICS website until 6 December 2017.