New RICS Professional Statement for Commercial Service Charges

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Service charges in commercial property, a new Royal Institution of Chartered Surveyors (RICS) professional statement which applies to the whole UK, has come into effect for all service charge periods. Compared with its predecessor, the Service Charge Code, the new statement has increased regulatory importance for RICS surveyors and is endorsed by property bodies from across the property industry. However, while the statement is a code of practice, it does not carry the force of a new law.

The Statement underlines the intention of the RICS to eliminate the use of unfair and opaque service charge regimes by landlords to exploit their tenants. It sets out important obligations and best practice which RICS surveyors and regulated organisations will be expected to comply with in their entirety unless there are justifiable reasons not to do so. However, it is not made clear in the statement what action should be taken if the client or employer of a RICS surveyor refuses to comply

The Statement provides guidance on the negotiation, drafting, interpretation and operation of leases. However, importantly, it cannot override the terms of an existing lease. Equally, the tenant’s liability to pay service charge under the lease will not be negated or limited by a failure to comply with the Statement. The RICS says that the Statement will help in the interpretation of leases and thereby ensure effective management of services.

As well as promoting best practice and encouraging greater uniformity in how commercial property services charges are administered, the Statement aims to ensure the timely issue of budgets and year-end certificates and bolster dispute resolution guidance.

However, it’s the mandatory requirements and, to a lesser extent, the core principles that are the key regulatory element for surveyors acting for landlords or tenants.

Mandatory requirements

The Statement includes nine mandatory requirements. These include:

  • All 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.
  • The owner and manager must ensure that service charge budgets, including appropriate explanatory commentary, and an approved set of service charge accounts showing a true and accurate record of actual expenditure, are provided annually to all tenants. A service charge apportionment matrix for their property must also be provided annually to all tenants.
  • Service charge money must be held in one or more discrete or virtual bank accounts. Virtual accounts include the use of separate ledgers.
  • Practitioners acting on the tenant’s behalf 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.

Core principles and Best practice

The mandatory requirements are backed up by 24 core principles. Because, in some cases, the principles may be difficult to quantify, strict adherence cannot always be possible. Therefore, depending on the circumstances, the appropriate level of compliance may be based on the professional judgment of all parties involved.

The core principles include:

  • All costs should be transparent and itemised. Management fees should be on a fixed-price basis with no hidden mark-ups.
  • The process of apportioning costs should be demonstrably fair and reasonable.
  • Managers should issue statements of accounts and/or certify expenditure, managers in a non-partisan spirit, acting as experts. In addition to the manager’s certificate, annual statements of expenditure should be supported by an independent review of the service charge accounts. Industry Standard Cost Classifications should be used in reporting budget and actual expenditure.
  • New leases should make provision for either party to require the resolution of disagreements through alternative dispute resolution.

Under the guidance, managers should issue budgets to tenants, including explanatory commentary and apportionment matrix, at least one month prior to the start of the service charge year. Detailed statements of actual expenditure, together with accounting policies and explanation, should be issued within four months of the service charge year-end. This rigid timeframe for provision of information was opposed. However, it’s not a mandatory requirement and also subject to existing lease terms.

Interestingly, managers are expected to procure quality service standards to ensure that value for money is achieved at all times, rather than merely the lowest price.

Some of these core principles may impact on exclusions from what should be charged to tenants through the service charge. Accordingly, tenants should not be charged for:

  • Initial costs incurred in relation to the original design and construction of the fabric, plant or equipment.
  • Any improvement costs above those of normal maintenance, repair or replacement. However, service charge costs may include enhancement of the fabric or plant, where such expenditure can be justified on a cost-benefit analysis.
  • Future redevelopment costs.
  • 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.
  • Costs attributable to void premises and the owner’s own use of the property.

A raft of best practice recommendations are also included. Compliance with them will depend on the size, nature and type of property, the aggregate of the total service charge costs and the amounts payable by individual occupiers. Surveyors and lawyers should examine the service charge provisions in lease standards with a view to achieving compliance with the Statement.