Service charge changes on the horizon
Author: Michael Callaghan
Applies to: England and Wales
The RICS has launched a consultation on the fourth edition of the Service Charge Code for commercial property.
The draft code is available on-line on the RICS website. Reponses to the consultation should be made by 6 December 2017.
Service charges can be a source of contention between landlords and tenants. Where the landlord provides services and charges their cost to the tenants, a properly run service charge can reduce the scope for conflict and make the management of the property easier. To assist with this process, the RICS published the first edition of its Service Charge Code (the Code) in 2007. It set out the best practice for surveyors to follow in providing services and operating service charge accounts, with the intention improving transparency and communication between the landlord and the tenant and reducing the risk of disputes arising. The Code is currently in its third edition.
Although the Code is addressed to surveyors, the terms of the Code have influenced the drafting of service charge provisions in leases, either through the initiative of landlords or by tenants amending draft leases to ensure that the service charge clauses are 'code compliant'. For example, the Modern Commercial Lease, an industry standard form of lease, includes a statement that the landlord must take into consideration the administrative, accounting, procurement, management and operational provisions of the Code.
What is changing?
The new edition of the Code introduces a sea-change. Instead of simply setting out best practice, it will become an RICS Practice Statement with mandatory principles that surveyors will be bound to follow, with guidance on best practice that illustrates how those principles should be applied.
There are eight mandatory principles:
- 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.
- Owners and managers must ensure that service charge budgets, including appropriate explanatory commentary, are issued annually to all tenants.
- 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.
- Owners and managers must ensure that a service charge apportionment schedule for their property is provided annually to all tenants.
- All expenditure that the owner and manager seeks to recover must be in accordance with the terms of the lease.
- Service charge monies (including reserve and sinking funds) must be held in one or more discrete (or virtual) bank accounts.
- All 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. This applies, for instance, to bank charges, tax, etc.
- Where acting on behalf of a tenant, RICS members 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.
The new Code will also, amongst other things:
- incorporate the RICS's guidance on service charge handover on the sale of a property and on the operation of sinking funds, reserve funds and depreciation charges;
- give additional guidance on some areas of service charge management;
- recommend including a cash reconciliation or improvised balance sheet as part of the service charge accounts to aid transparency;
- give increased emphasis to alternative means of dispute resolution.
Effect of the changes
Property managers will want to ensure that they are familiar with the terms of the new Code so that they do not act in breach of its provisions. The mandatory principles will undoubtedly mean that they will want to ensure that service charge provisions in leases can be operated in accordance with the Code and are drafted accordingly.
The Code recommends that lease renewals are used as an opportunity to update non-compliant service charge clauses, even if this means that, for a time, there may be new and old service charge clauses in different leases of the same property. Whether landlords and tenants will want to incur the additional expense of doing so remains to be seen.
Click here to read the draft Service Charge Code
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.