New requirements launched by RICS last year set a marker for the standard of management required in commercial property and provide mandatory obligations that its members and any RICS regulated firms engaged in this area must comply with.
The new rules came into effect for service charge years starting on or after 1st April 2019 and have been put in place to ensure service charges to commercial tenants are transparent, upfront and fair, and that any costs incurred are in accordance with the terms of the occupational lease.
The objectives of the RICS professional statement ‘Service charges in commercial property’ is 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 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.
The launch of the professional statement is a significant move in helping to better regulate the activities of landlords and their agents, whilst protecting tenants from having to pay for ambiguous charges such as repair or maintenance costs.
RICS has worked with major property bodies, managing agents, the ICAEW and Law Society to produce the recommendations, with balanced requirements that reflect the needs of all stakeholders with specific considerations of different sectors.
The professional statement calls for any potential or future changes to service costs to be made clear and obvious to tenants at the outset, and that any costs not specifically mentioned in a lease will not be recoverable from the tenants. It also provides guidance on more technical matters, including the way in which service charge monies should be held within bank accounts.
There are nine mandatory requirements imposed by the professional statement:
- All expenditure that an owner/manager seek to recover must be in accordance with the terms of the lease;
- Owners/managers must seek to recover no more than 100% of the proper and actual costs of the provision or supply of services;
- Owners/managers must ensure that service charge budgets, including appropriate explanatory commentary, are issued annually to all tenants;
- Owners/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/managers must ensure that a service charge apportionment matrix 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.
There are also several core principles referred to in the statement which underpin the mandatory requirements listed above. The statement acknowledges that some are harder to quantify than others and it is left to the professional judgement of the parties as to the appropriate and reasonable level of compliance in the circumstances.
These new requirements are being widely received by the industry with a clear and robust set of guidelines that equally benefit occupiers, landlords and agents.