Service charges – what’s actually changed?

This professional statement sets a marker for the standards of management required in commercial property and provides mandatory obligations that RICS members and regulated firms engaged in this area must comply with. It has been endorsed by property bodies representing all sides of the property industry and widely acknowledged as a significant step forward for the property industry. This document is effective from 1st April 2019.

The aims and objectives of this professional statement 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 timely issue of budgets and year-end certificates

• reduce the causes of disputes and to provide guidance on resolution, and

• provide guidance to solicitors, their clients (whether owners or occupiers) and managers of service charges in the negotiation, drafting, interpretation and operation of leases, in accordance with best practice.

Although this document is a first edition PS, it supersedes the previous 3 editions published as codes of practice from 1 April 2019.

The changes will apply to RICS members and regulated firms throughout the UK. The new service charge requirements are more prescriptive than the current regime and set out mandatory requirements for landlords.  And while much of the guidance remains the same as the previous Code of Practice, there are a number of updates that will affect those in the industry.

It will also have the regulatory effect of formalising the Code within the RICS best practice framework.

The new changes are particularly noteworthy for those involved as disputes between landlords and tenants often relate to the level of service charges levied. Therefore both parties — landlords and tenants — will need to be aware of the requirements of the updated service charge regime.

History

Guidance for the management and administration of service charges in commercial property was first published in 1996. This is the 6th iteration of what has become known as the Service Charge Code. In the 23 years since its inception, the Code is generally considered to have had a positive impact on the commercial property sector and has facilitated major improvements in standards of delivery and accountability for service charges.

Aims and objectives of the professional statement

• improve general standards and promote best practice, uniformity, fairness and transparency in the management and administration of services charges in commercial property

• ensure 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 and

• provide guidance to solicitors, their clients (whether owners or occupiers) and managers of service charges in the negotiation, drafting, interpretation and operation of leases, in accordance with best practice.

Requirements

Under the new Service Charge professional statement, RICS members and regulated firms must comply with the following mandatory requirements:

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

2. 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.

3. Owners and managers must ensure that service charge budgets, including appropriate explanatory commentary, are issued annually to all tenants.

4. Owners and 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.

5. Owners and managers must ensure that a service charge apportionment matrix for their property is provided annually to all tenants.

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

7. 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.

8. 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.

9. 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.

Statement v Lease

One important point to note is that the new Statement cannot override lease terms. However, it is advised that service charge provisions must be laid out and considered in conjunction with the statement, in order to help identify the best interpretation of the lease, and to ensure compliance as far as possible. Failure to do so would be taken into consideration in the event of a dispute between tenant and landlord.

Outcomes

It is hoped that the new Statement will continue to improve the standard of delivery in landlord services and provide accountability for spending what is effectively tenants’ money.

In the main managing agents and landlords already abide by the principles of the existing code, but naturally, there are many instances where best practice has been ignored, in some cases to extreme degrees. Such behaviour is, of course, unacceptable and it is moments such as these that RICS are looking to significantly reduce, not to mention improving procedures and landlord/tenant relationships across the board.

What should landlords be doing to ensure they are compliant?

Tenants are likely to be better informed of their rights in relation to service charges incurred and more confident in service charge disputes with landlords. Therefore in the build up to 1 April 2019, landlords should ensure that they are able to meet the mandatory requirements set out above.

It will also be interesting to consider the effect on lease renewal proceedings under the Landlord and Tenant Act 1954 and whether tenants’ increasingly request to modernise the service charge arrangements in a renewal lease, in line with the professional statement.

The RICS will also take account of the professional statement when deciding if a RICS member has acted with reasonable competence during disciplinary proceedings and it is likely to be referred to during professional negligence claims against surveyors

JASON ANTILL BSc (Hons) MRICS DipNDEA

Director

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