RICS Code of Practice for service charges in commercial property

Posted on: January 15th, 2019

The property sector is preparing for the introduction of the new RICS Professional Statement, Service Charges in Commercial Property 1st edition, which will supersede the current code of practice from 1 April 2019.

RICS stated aims are to “improve general standards and promote best practice, uniformity, fairness and transparency in the management and administration of services charges in commercial property” and “to reduce the causes of disputes, and to provide guidance on the resolution of disputes if these arise”.

The key change from the current regime is the inclusion of nine mandatory obligations for RICS members and regulated firms (i.e. firms that have chosen to be regulated by RICS and agree to work to its standards). The mandatory obligations include the following:

  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.
  2. Service charge budgets must be issued annually to all tenants.
  3. A signed statement showing a true and accurate record of the actual expenditure constituting the service charge must be provided annually to all tenants.
  4. All interest earned on service charge accounts must be credited to the service charge account after appropriate deductions such as bank charges, tax, etc. have been made.

In addition to the mandatory requirements, the Statement contains 24 core principles. RICS has acknowledged that, in rare circumstances, strict compliance with these might not always be possible. However, the core principles should only be departed from where there is a good justifiable reason to do so. A selection of some of the core principles are set out below:

  • All costs should be transparent so that the parties are aware of how they are made up.
  • The basis and method of apportionment of costs should be demonstrably fair and reasonable.
  • When issuing statements of accounts and/or certifying expenditure, managers should do so in a non-partisan spirit, acting as experts.
  • In addition to the manager’s certificate, annual statements of expenditure should be supported by an independent review of the service charge accounts.
  • The manager should procure quality service standards to ensure that value for money is achieved at all times. The aim here is to achieve effective value for money service, rather than merely the lowest price.

Tenants should not be charged for:

  • Initial costs incurred in relation to the original design and construction of the fabric, plant or equipment.
  • Any improvement costs above the costs of normal maintenance, repair or replacement. However, service charge costs may include enhancement of the fabric or plant, where such expenditure can be justified on a cost-benefit analysis.
  • Future redevelopment costs.
  • Costs and fees relating to the owner’s investment interest, such as asset management and rent collection, and matters between the owner and an individual tenant.
  • Costs attributable to void premises and the owner’s own use of the property.

The Professional Statement also includes over 25 pages of best practice recommendations. The extent to which they should be complied with depends on issues such as the size, nature and type of property, the aggregate of the total service charge costs and the amounts payable by individual occupiers.

While the statement will not supersede the terms of a lease, it will, if read in conjunction with the lease, provide guidance to solicitors, clients, owners and managing agents in the understanding, negotiating, drafting and operation of service charge provisions in leases.

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