Landlords and tenants know all too well the potential arguments and pitfalls when it comes to paying service charges. Although a ‘Service Charge Code’ has existed for some time, there was a consensus in the Real Estate sector that more formal guidance on the administration of service charges was required.
The RICS Professional Statement, Service Charges in Commercial Property (1st edition) (“the Professional Statement”) came into force on 1 April 2019 for service charge periods commencing on or after that date. It moved to formalise the previous ‘Service Charge Code’ and sets out best practice in the management and administration of service charges in commercial property. It also contains mandatory requirements which RICS members and regulated firms are expected to comply with.
The mandatory requirements
There are nine mandatory requirements which the RICS consider to be an acceptable standard of performance for RICS members and regulated firms:
- all expenditure sought to be recovered must be in accordance with the terms of the lease;
- (subject to certain exceptions) no more than 100% of the proper and actual costs of the provision or supply of the services can be recovered;
- service charge budgets, including appropriate explanatory commentary, must be issued annually to all tenants;
- an approved set of service charge accounts showing a true and accurate record of the actual expenditure constituting the service charge must be provided annually to all tenants;
- a service charge apportionment matrix must be provided annually to all tenants;
- service charge monies (including reserve and sinking funds) must be held in one or more discrete (or virtual) bank accounts;
- interest earned being credited back to the account (after appropriate deductions have been made);
- when acting on behalf of a tenant, practitioners must advise their clients that if a dispute exists any service charge payment withheld by a tenant should reflect only the actual sum in dispute; and
- when acting on behalf of a landlord, practitioners must advise their clients that following resolution of a dispute any service charge that has been raised incorrectly should be adjusted to reflect the error without undue delay.
The core principles
There are 24 core principles which support the mandatory requirements. They deal with service costs, allocation and apportionments, communication and consultation, financial competence, occupiers responsibilities, right to challenge/alternative dispute resolution, timeliness, transparency, value for money and service charge exclusions.
The RICS acknowledge that some of the principles may be difficult to quantify and that, in rare circumstances, strict compliance may not always be possible. The appropriate level of compliance is to be based on the professional judgment of all parties as to what is appropriate and reasonable considering all the circumstances.
The Professional Statement also contains over 25 pages of recommendations to support the core principles and help members achieve the mandatory requirements. The extent to which they should be complied with depends on issues such as the size, nature and type of property, the aggregate of the total service charge costs and the amounts payable by individual occupiers. It should also be noted that the RICS offers additional guidance for specific types of commercial properties, for example, mixed use developments and shopping centres, retail and leisure parks and business campuses.
Lease v the Professional Statement
The Professional Statement does not override the terms of a lease but, if read in conjunction with it, can provide greater clarity to owners, managing agents, occupiers and solicitors when interpreting, negotiating, drafting and operating service charge provisions. Landlords should try to ensure that new leases are consistent with the Professional Statement and tenants should understand what procedures are expected if service charge payments are disputed.
Seleena Nadkarni is a Senior Associate in Real Estate
14 August 2019
This Legal Update is published as a general guide only and it is not intended to contain definitive legal or professional advice, which should be obtained as appropriate in relation to any particular matter. This publication relates to matters prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.