Are you being served?

A new professional statement on service charges in commercial property has been published by the RICS.

This new professional statement, “Service charges in commercial property (1st Edition)”, comes into force on 1 April 2019. It replaces the third edition of the Service Charge Code.

The new statement both 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 must comply with.

Mandatory obligations

There are nine mandatory obligations that must be followed by RICS members and regulated firms. Of these, the most significant are:

• Expenditure can be recovered only in accordance with the terms of the lease. Landlords should not recover more than the actual costs of providing the services (including reasonable management fees);
• Tenants must be provided annually with service charge budgets (to include appropriate explanatory commentary), and approved service charge accounts and an explanation of service charge apportionments;
• Service charge monies must be held in one or more discrete or virtual bank accounts with interest;
• In case of dispute, tenants must be advised only to withhold the amount in dispute, not the full service charge payment; 
• When a dispute reveals that an error has been made, landlords must be advised to adjust service charges without undue delay.

Core principles

24 core principles underpin the mandatory obligations. The appropriate level of compliance with the core principles may be based on the professional judgment of all parties as to what is appropriate and reasonable in all the circumstances.

Service charges should be run in a transparent manner on an appropriate value for money basis. The aim is to achieve effective, value for money, service rather than merely the lowest price.

The basis and method of apportionment of service charge should be demonstrably fair and reasonable. It should ensure that individual occupiers bear an appropriate proportion of the total service charge expenditure and that this clearly reflects the availability, benefit and use of services.

Budgets are expected to be provided no later than one month before the service charge year begins. End of year accounts should be provided within four months after the end of the service charge year. Disputes about service charges should be resolved by alternative dispute resolution rather than through the courts. Timely and open communications and consultations about services are required.

Tenants should pay service charges promptly and be proactive in assisting landlords with the delivery of services.

There are particular costs that should not be recovered through the service charge. These include initial set-up costs, the costs of improvements that go beyond maintenance, repair and replacement, future redevelopment costs, the landlord’s own investment and asset management costs and costs relating to void premises.

Recommendations and their impact on leases

The professional statement sets out 25 pages of best practice recommendations stating how the mandatory requirements and core principles can be achieved covering all aspects of service charges. These include: 

• that existing service charge clauses should be interpreted in line with the principles and practices set out in the professional statement, unless the lease specifically stipulates a different approach.
• that service charge provisions in new leases and on lease renewals are brought up-to-date to reflect the requirements of the professional statement. Terms should be relevant and appropriate, recognising the length of the lease term, and the scale and type of property concerned.

The professional statement is longer than most leases and so it will not be appropriate to include every provision of it into a new lease. However, some of the key principles can be included such as a fair and transparent means of apportioning the service charge, the provision of budgets and end of year accounts and clear service charge exclusions.

Effect of the changes

Property managers will want to ensure that they are familiar with the terms of the new professional statement so that they do not act in breach of its provisions. The mandatory principles will mean that they will want to ensure that service charge provisions in leases can be operated in accordance with the professional statement and are drafted accordingly.