The recently released professional statement on service charges in commercial property (1st edition) (the "Statement") replaces the code of practice on service charges in commercial property (3rd edition) (the "Code") on 1 April 2019.
What is the Statement?
The Statement sets out best practice in the management and administration of service charges in commercial property. It provides mandatory obligations and best practice recommendations to help a party achieve those mandatory obligations. The purpose of the Statement is to ensure that service charges to commercial tenants are transparent, upfront and fair.
Who does the Statement apply to?
RICS members and RICS regulated firms, ie firms that have chosen to be RICS regulated and agreed to work to RICS standards.
What status does the Statement have?
A party must not depart from mandatory obligations. If a party wants to depart from the best practice recommendations, this should be in exceptional circumstances and they should have justifiable reasons for doing so. The terms of a lease will always override the Statement but the Statement can plug any gaps left by a lease.
The Statement is not legally binding in the same way as statute but will be taken into account in a dispute and/or proceedings in the same way as the Code. A failure to comply with the Statement may have legal consequences and/or disciplinary consequences for surveyors.
What has changed from the Code?
The biggest change is the introduction of mandatory obligations and there is no significant change in content from the Code aside from this. In addition, there is an expansion of best practice recommendations and small changes including:
- References to management fees now expressly include the fees of entities related to the managing agent and accommodation/ancillary office costs of site-specific management staff.
- Budgets and accounts should be issued with a report providing a comparison against the actual costs of the previous year where appropriate. This contrasts with the requirement in the Code to provide a comparison of actual costs of the previous two years.
- Guidance that was originally confined to service charge provisions relating to shopping centres now encompasses retail and leisure parks and business campuses.
The ability to refer to mandatory obligations will no doubt be helpful in seeking to resolve any disputes between landlords and tenants associated with service charge and be a useful starting point in negotiating service charge provisions in new commercial leases. The Statement is also likely to be a useful aid in plugging any gaps inadvertently left by service charge provisions in existing leases.
However, as the Statement cannot override the terms of a lease, there may still be situations, such as older leases or leases where the parties are poorly advised, where problematic or unclear service charge provisions may rear their ugly heads.
Although the Statement does not bear the same teeth as the statutory protection associated with residential service charges, the introduction of mandatory obligations is a step towards an appropriate compromise between providing commercial tenants with adequate protection from rogue landlords and/or managing agents and retaining the flexibility to negotiate commercially viable terms.