15 Oct 2018

Last month, the Royal Institution of Chartered Surveyors ("RICS") published its latest Professional Statement, entitled "Service Charges in Commercial Property" (the "Statement"). The Statement re-states updates and replaces the existing Service Charge Code (the "Code"), and has the regulatory effect of formalising the Code within the RICS best practice framework. The Statement is effective from 1 April 2019 and will apply to all Service Charges across the UK.

The Statement sets out best practice in the management and administration of service charges in commercial property and provides mandatory obligations that RICS members and regulated firms engaged in this area must comply with or potentially face disciplinary proceedings.

The Statement is not capable of overriding the terms of a lease, however, service charge provisions must be read in conjunction with the Statement to help identify the best interpretation of the lease provisions, and ensure compliance with the Statement as far as possible.

Aims and objectives

The Statement has four main aims and objectives:

  1. To improve general standards and promote best practice, uniformity, fairness and transparency in the management and administration of service charges in commercial property.
  2. To ensure timely issue of budgets and year-end certificates.
  3. To reduce the causes of disputes and provide guidance on dispute resolution.
  4. To provide guidance on the negotiation, drafting and interpretation of leases in accordance with best practice.

Mandatory requirements

The Statement provides nine mandatory requirements, which are considered the minimum acceptable standards of performance and which professionals involved with the management of service charge accounts must comply with.

Mandatory requirements include:

  1. Owners and managers must ensure that service charge budgets, including appropriate explanatory commentary, are issued annually to all tenants.
  2. Service charge monies (including reserve and sinking funds) must be held in one or more discrete (or virtual) bank accounts.
  3. Where 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.
  4. All expenditure that the owner and manager seek to recover must be in accordance with the terms of the lease.

Core principles

The Statement also contains twenty-four core principles, which are said to underpin and support the mandatory requirements. The RICS include a caveat for the core principles, stating that some may be difficult to quantify and that in rare circumstances strict compliance may not always be possible. In these cases the appropriate level of compliance will be left to the professional judgement of all parties involved.

Examples of the more significant core principles include:

  1. Best practice recommends that services are procured on an appropriate value for money basis, and that competitive quotations are obtained or the costs benchmarked.
  2. While the owner has the right to set the standards by which their investment will be managed and has a duty to manage, managers should consult with occupiers regarding the standard and quality of service charge provision required.
  3. Managers claiming compliance with the principles of this professional statement should be transparent in demonstrating how they comply with it.
  4. All new leases (including renewals) should make provision for either party to require the resolution of disagreements through alternative dispute resolution (ADR) as a cost-effective alternative to court action.

A proportion of the core principles have a direct impact on the lease provisions, going as far as to exclude specific activities from being eligible for service charge costs, including:

  1. Any initial costs (including the cost of leasing of equipment) incurred in relation to the original design and construction of the fabric, plant or equipment.
  2. Any setting up costs, including costs of fitting out and equipping the on-site management offices that are reasonably considered part of the original development cost of the property.
  3. Any improvement costs above the costs of normal maintenance, repair or replacement.
  4. Future redevelopment costs.

Guidance

The Statement also contains extensive guidance on best practice in support of the mandatory requirements and core principles. Adherence to the recommendations contained in this guidance is again left to professional judgement of the parties involved, taking account of what is reasonable in each specific circumstance.

Also, in the Appendix, a compliance checklist is provided which can be used to ensure compliance with the Statement after it takes effect next April.

Conclusion

The Statement has increased the regulatory weight of the Service Charge Code, and as such the mandatory requirements and core principles should be carefully considered by professional practitioners who advise on the terms of new commercial leases, or who are involved with service charge provisions in leases.