All change – introduction of new service charge requirements for commercial property
In September 2018 RICS published a professional standards and guidance statement called “Service Charges in Commercial Property”. This statement sets out benchmarks when dealing with service charges which apply commercial property leases. It provides mandatory obligations that RICS members and RICS regulated firms must comply with.
This statement become effective from 1 April 2019 and replaces the previous editions of the RICS Codes of Practice relating to Service Charges in commercial Property.
Who does this apply to and what effect will it have?
This statement will apply to all RICS members and firms regulated by it and they are obliged to comply. Failure to do so is only allowed so long as the member has property justified the reasons why – unhelpfully it doesn’t set any guidelines as to what a justifiable reason is.
The statement is not designed to override the main terms of an existing lease but should be read in conjunction with it.
The statement sets out two types of guidance – mandatory and good practice. When the word “must” is used it is mandatory and when the word “should” is used then it is considered good practice.
Failure to follow mandatory and/or good practice provisions
The consequences of failing to follow the new guidance is that the RICS member may well face professional standard disciplinary proceedings.
Any failure to comply can also be brought to a court or adjudicator’s attention when it is attempting to decide a dispute – although that failure will not of itself be sufficient to negate or limit an occupier’s liability to pay a service charge. As such be prepared to justify why it wasn’t followed and to produce contemporaneous notes setting out your thought process at the time. If it can be shown that a client lost their dispute due to the failure to follow good practice, then a RICS member may expose them self to a professional negligence claim.
What are the aims of the statement?
The main aims of the statement are:
1. to improve general standards and promote best practice, create uniformity, fairness and transparency in the management and administration of service charges in commercial property;
2. to ensure a timely issue of budgets in the year end certificates;
3. to reduce the causes of dispute and also to provide guidance and resolution of disputes if they do arise;
4. to provide guidance to solicitors, their clients and managers of service charges.
1. All expenditure the owner and managers seek to recover must be in accordance with the terms of the lease.
2. Subject to a lease specifying a fixed service charge, owners and managers must seek to recover no more than 100% of the proper actual costs of the provision or supply of the service.
3. Owners and managers must ensure that service charge budgets, including appropriate explanatory commentary, are issued annually to all tenants.
4. When acting on behalf of the 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.
The Core Principle
The guidance sets out that the mandatory obligations must be supported by the Core Principles. RICS do however acknowledge that some of the core principles may be difficult to quantify and in rare circumstances strict compliance may not always be possible. In summary, those core principles are:
1. Service costs – should be a fixed fee and transparent.
2. Allocation and apportionment – Costs should be allocated to the relevant expenditure category and the basis and method of apportionment should be demonstrably fair and reasonable.
3. Communication and consultation – 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.
4. Duty of care – Those certifying service charge accounts should recognise that they have a duty of care to both owners and occupiers to act with professional care, diligence, integrity and objectivity.
5. Financial competence – When issuing statements of accounts and/or certifying expenditure, managers should do so in a non-partisan spirit, acting as experts.
6. Occupier responsibilities – Occupiers should ensure prompt payment of all legitimate service charge on-account and balancing charges.
7. Right of challenge / alternative dispute resolution – 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. Where leases do not allow for ADR, parties are reminded that there is nothing to stop them agreeing to use ADR to resolve a dispute.
8. Timeliness – Communication and consultation between managers and occupiers should be timely and regular to encourage and promote good working relationships.
9. Transparency – By being transparent in the accounts, the explanatory notes, policies and day-to-day management, the manager will help prevent disputes.
10. Value for money – Service quality should be appropriate to the location, use and character of the property.
11. Costs excluded from being service charges – any initial costs incurred in the original development or any improvement costs.
Best practice provisions
The best practice provisions then go on to provide detailed recommendations as to the logistics of meeting the requirements of the new professional statement. These are designed to support RICS in implementing the core principles and deal with the following areas:
- Allocation of apportionment
- Communication and consultation
- Dealing with existing and new leases
- Financial control and competency
- Dispute resolution
- Mixed use developments
- Provision for anticipated future expenditure
- Initial provision, replacement and improvement of fabric, plant and equipment
- Social, economic and environmental sustainability
- Additional best practice guidance for shopping centres, retail and leisure parks in business camps
The guidance also provides a useful checklist for RICS members to utilise to ensure that they are complying with their obligations.
The best practice guide can be found at the following web address:
The content of this article is not intended to be specific legal advice. If you require any assistance in relation to this area of law, please contact Michael Clark for a no obligation telephone consultation.