Serving Up a Change: Service Charge Update

The Royal Institution of Chartered Surveyors (RICS) Professional Statement on Service Charges in Commercial Property, 1^st edition (‘the Professional Statement’) became effective for all service charge periods commencing from 1 April 2019.

The Professional Statement supersedes the third edition of the RICS Code of Practice on Service Charges in Commercial Property (‘the Service Charge Code’) which has been in effect since 2014. Unlike the Service Charge Code, the Professional Statement contains a number of mandatory requirements which must be complied with by members of RICS and any firms which are regulated by RICS. In addition to these mandatory requirements, the Professional Statement sets out what RICS considers to be best practice in the management and administration of service charges in commercial property.

Aims of the Professional Statement

The Professional Statement states that its aims and objectives are to:

• Improve general standards and promote best practice, uniformity, fairness and transparency in the management and administration of services charges in commercial property
• Ensure the timely issue of budgets and year-end certificates
• Reduce the causes of disputes and to provide guidance on the resolution of disputes if these arise
• Provide guidance to solicitors, their clients and managers of service charges in the negotiation, drafting, interpretation and operation of leases in accordance with best practice

Mandatory Requirements

Those bound by the Professional Statement must act in accordance with the following nine principles which constitute the mandatory requirements:

• All expenditure that owners and service charge managers seek to recover must be in accordance with the terms of the lease
• Owners and service charge managers must seek to recover no more than 100% of the proper and actual costs of the provision or supply of the services
• Owners and service charge managers must ensure that service charge budgets (including appropriate explanatory commentary) are issued annually to all tenants
• Owners and service charge 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
• Owners and service charge managers must ensure that a service charge apportionment matrix (being schedules containing at the very least information specifically prescribed in the Professional Statement) for their property is provided annually to all tenants
• Service charge monies (including reserve and sinking funds) must be held in one or more discrete (or virtual) bank accounts
• 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
• 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
• 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

Core Principles

The Professional Statement sets out 24 core principles which are designed to support and assist in fleshing out the mandatory requirements. These include the following matters (and the Professional Statement contains detailed guidance on each):

• Service costs
• Allocation and apportionments
• Communication and consultation
• Duty of care
• Financial competence
• Occupier responsibilities
• Right to challenge
• Timeliness
• Transparency
• Value for money exclusions

Putting It Into Practice

It is anticipated that tenants will welcome the introduction of the Professional Statement and its mandatory status. Since the introduction of the initial Service Charge Code some years ago, many tenants have valiantly attempted to persuade landlords to adhere to it and to introduce lease terms which reflected its best practice recommendations albeit with varying success. Key service charge  issues for tenants, such as a right to challenge the service charge certificate and items to be excluded from the service charge, have often been difficult to introduce into leases where landlords have been reluctant to change existing service charge regimes and structures.

An important point to bear in mind is that the Professional Statement only binds members of RICS and those who are regulated by them. Whilst a landlord’s surveyor may be required to act in accordance with the Professional Statement, a non RICS regulated landlord (or its solicitor for that matter) may not, meaning that there would be no obligation on it to reflect the provisions of the Professional Statement in its leases.

It should also be noted that the Professional Statement cannot override existing leases. In addition,  it will be interesting, going forward, to see how the Professional Statement interacts with lease renewal proceedings under the Landlord and Tenant Act 1954. Whilst the Professional Statement sets out mandatory requirements it does not have statutory status.