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RICS Steps Up Regulations For Commercial Service Charges

On 25 October 2017 RICS (Royal Institute of Chartered Surveyors) launched a consultation on a new draft Professional Statement on Service Charges in Commercial Property. The aim of the new Professional Statement is to ensure that service charges to commercial tenants are transparent, upfront and fair and provide that costs incurred for maintenance and repair are in accordance with the terms of the lease.

The new Professional Statement is due to be effective from 1 April 2018 and will supersede the Third Edition of the RICS Code of Practice: ‘Service Charges in Commercial Property’ which merely recommends ‘best practice’. The new Professional Statement will provide eight mandatory core principles to which RICS members and regulated firms must comply with. Departing from the requirements may trigger serious legal and/or disciplinary consequences which may include a finding of negligence against a surveyor.

The eight core principles are as follows:

  1. 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 unless the lease of the property gives them the explicit right to do so. 2.Owners and managers MUST ensure that service charge budgets, including appropriate explanatory commentary are issued annually to all tenants.

    3. Owners and managers MUST ensure that a signed statement showing a true and accurate record of the actual expenditure constituting the service charge is provided annually to all tenants. 

    4. Owners and managers MUST ensure that a service charge apportionment schedule for their property is provided annually to all tenants. 

    5. All expenditure that the owner and manager seek to recover MUST be in accordance with the terms of the lease. 

    6. Service charge monies (including reserve and sinking funds) MUST be held in one or more discrete (or virtual) bank accounts. 

    7. All interest earned on service charge accounts – or where separate accounts per property are not operated, a proper and reasonable amount of interest calculates on normal commercial rates – MUST be credited to the service charge account after appropriate deductions have been made. This applies for instance to bank charges, tax etc. 

    8. Where acting on behalf of a tenant, RICS members MUST advise their clients that if a dispute exists any service charge payment withheld by a tenant should reflect only the actual sums in dispute.

These principles are underpinned by extensive best practice guidelines which generally reflect the values contained in the current Code of Practice (with general updating). The best practice guidelines remain ‘best practice’ and are not mandatory.

It’s likely that the vast majority of modern service charge provisions contained in new leases granted by landlords will already be consistent with the mandatory principles and best practice guidelines. The new Professional Statement may however reveal a sticking point for older leases with outdated service charge provisions, especially where landlords wish to repeat the existing service charge provisions when granting new leases to ensure consistency and recovery across an estate. These service charge provisions may not prove to be easily compatible with the new mandatory principles and best practice guidelines.

In practice:

These changes from a set of best practice guidelines to a set of mandatory principles highlights that the way service charge provisions are drafted and communicated to tenants must be more carefully considered than ever before.

It remains to be seen what impact the RICS changes will have in practice following the implementation of the Professional Statement in April, but if you have any queries arising from the leases within your portfolio, please do get in touch.

 

by Anya James-Weller
Solicitor

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