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26th September 2018

RICS code of practice for service charges in commercial properties

The Royal Institute of Chartered Surveyors (RICS) has announced the publication of their new professional statement, which will supersede the previous three Service Charge Codes.
The new statement, Service charges in commercial property (1st edition), will come into force on 1 April 2019 and includes nine mandatory principles whilst expanding on the recommendations and best practice detailed in previous codes. The professional statement also aims to ensure timely issue of budgets and year end certificates, provides guidance as to the resolution of disputes and advice on technical matters such as the way service charge monies are held.

There are nine mandatory requirements imposed by the professional statement:

  1. All expenditure that an owner and manager seek to recover must be in accordance with the terms of the lease;
  2. Owners and managers must seek to recover no more than 100% of the proper and actual costs of the provision or supply of services;
  3. Owners and managers must ensure that service charge budgets, including appropriate explanatory commentary, are issued annually to all tenants;
  4. Owners and managers must ensure that an approved set of service charge accounts showing a true and accurate record of the actual expenditure constituting the service charge are provided annually to all tenants;
  5. Owners and managers must ensure that a service charge apportionment matrix for their property is provided annually to all tenants;
  6. Service charge monies (including reserve and sinking funds) must be held in one or more discrete (or virtual) bank accounts;
  7. Interest earned on service charge accounts – or where separate accounts per property are not operated, a proper and reasonable amount of interest calculated on normal commercial rates – must be credited to the service charge account after appropriate deductions have been made;
  8. 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;
  9. 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.
There are also a number of core principles referred to in the statement which underpin the mandatory requirements listed above. The statement acknowledges that some are harder to quantify than others and it is left to the professional judgement of the parties as to the appropriate and reasonable level of compliance in the circumstances.

The core principles focus on what a landlord can and cannot recover and the limits to the recovery of costs, including a focus on value for money. They focus heavily on transparent communication between all parties involved to ensure the standard and quality of provision is clear for all parties and the working relationship remains positive. They also cover procedures in terms of reporting budgets and outlines the duties owed by each party in relation to the service charge arrangement.

The professional statement may place an additional burden on landlords and agents who do not currently provide explanations and apportionment matrixes to their tenants. This enhanced focus on communication and transparency may not be welcome by all landlords and may initially require an increasing amount of time to be focused on complying with the new requirements. Commercial landlords should therefore begin to consider what, if any, changes they may need to make to their service charge management.

The publication of the statement is likely to be well received by commercial tenants, in particular those in multi-let properties who will now be able to understand the apportionment of the service charge in their property.

The statement will be applicable to all service charge periods commencing from 1 April 2019 and will be mandatory for RICS members and firms that have chosen to be regulated by RICS and work to those standards. Whilst members will be able to depart from the best practice, this will be only in the event of justifiable reasons and it could be expected that the best practice will be followed in the majority of cases.

The mandatory obligations must be complied with by all members and regulated firms. Equally, the best practice requirements are not merely suggestions but are incorporated as a guide that should only be departed from in limited circumstances and for justifiable reasons including proportionality. Failure to comply with not only the mandatory principles but also the best practice requirements may result in legal and/or disciplinary consequences for members, such as negligence findings against surveyors.

For more information, please contact Ceri Riddell on 01223 461155 or click here to email Ceri.
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