On 17th September 2018, the new Royal Institution of Chartered Surveyors (“RICS”) Professional Statement, ‘Service Charges in Commercial Property’ was published. This Statement will apply to all service charge periods from 1 April 2019 throughout the United Kingdom, with some differences in application in Scotland. Lawyers will be required to consider the service charge provisions within leases to ensure compliance with the new Statement. Crucially, the Statement cannot override the term of an existing lease.
Following on from the first two editions of the code of practice, the Statement aims to improve general standards and promote best practice, uniformity, fairness and transparency and to ensure the timely issues of budgets and year end certificates, ultimately reducing the causes of disputes. The RICS continue to be concerned by the poor property management displayed by certain landlords and agents. Consequently, the Statement introduces more serious regulatory implications if an RICS professional or regulated firm departs from the requirements.
The Statement constitutes mandatory requirements and best practice. The 9 mandatory requirements are considered to be the minimum acceptable standards of performance and must be complied with.
Examples of the new mandatory requirements are:
- Expenditure that the owner and manager seek to recover must be in accordance with the terms of the lease
- Owners and Managers must seek to recover no more than 100% of the proper and actual costs of the provision or supply of the services.
- Service charge monies must be held in one or more discrete bank accounts with any interest earned credited to the service charge account.
- Budget and year end accounts must be provided annually.
In addition to the mandatory requirements, the Statement contains 24 core principles. RICS has acknowledged that, in rare circumstances, strict compliance with these might not always be possible. However, the core principles should only be departed from where there is a good justifiable reason to do so.
Some examples of the core principles are:
- All costs should be transparent so that all parties are aware of how the costs are made up and management fees should be on a fixed-price basis with no hidden mark-ups.
- 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.
- Managers should consult with occupiers regarding the standard and quality of service charge provision required.
Evidently, some of the core principles will have a significant effect on lease provisions. Notably, the core principles include certain exclusions from service charge costs. In line with the core principles tenants should not be charged for the following:
- Initial costs incurred in relation to the original design and construction of the fabric, plant or equipment.
- Costs attributable to void premises and the owner’s own use of the property.
- Costs and fees relating to the owner’s investment interest, such as asset management and rent collection and matters between the owner and an individual tenant.
- Future redevelopment costs.
- Any improvement costs above the costs of normal maintenance, repair or replacement although the enhancement of the fabric and plant may be included where justified on a cost-benefit basis.
Further to the core principles, the Professional Statement contains lengthy recommendations of best practice. The extent to which these must be adhered to is to be determined by the professional judgement of the parties involved. Parties must consider what is reasonable and appropriate given the circumstances, including but not limited to, the size, nature and type of property, the aggregate of the total service charge costs and the amounts payable by each occupier.
The increased regulatory impact of the new Statement ought to prompt all parties to give careful consideration to the core principles and, in particular, the mandatory requirements before entering into new leases.
This article was co-written by Rudi Paton.