Hot Topic Highlight - Service charges in commercial property, professional statement - 1st edition (September 2018)

Posted on 18 / 09 / 18
by Jen Lemen

Hot Topic Highlight - Service charges in commercial property, professional statement - 1st edition (September 2018)

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This week, we are going to look at the new Service charges in commercial property, professional statement - 1st edition (September 2018).

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What’s new?

The RICS have published Service charges in commercial property, professional statement - 1st edition (September 2018). This is actually the 6th iteration of what was previously Service charges in commercial property, code of practice - 3rd edition.

What is the status of a professional statement?

A professional statement provides mandatory requirements and best practice for RICS members and regulated firms.

Why has a new edition been published?

To formalise the guidance as a professional statement. This confirms the importance of effective and consistent service charge management within the industry.

When does the professional statement apply from?

1 April 2019 in the United Kingdom.

What are the limitations of the professional statement?

It cannot override the terms of a lease. However, it can be used to interpret a lease to provide effective service charge management. It can also be used to provide a basis for service charges clauses in renewal or new leases.

Where can I find recommended clauses for renewal or new leases?

The City of London Law Society have published model service charge clauses which comply with the new professional statement.

What are the aims of the professional statement (RICS, 2018)?

  • 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
  • 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

What are the mandatory principles of the professional statement (RICS, 2018)?

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

2. Subject to section 4.2.7, 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.

Is any additional guidance provided?

Yes, Chapter 3 of the professional statement provides in-depth guidance relating to the core principles of service charge best practice. Chapter 4 provides further best practice guidance to support the core principles.

This includes principles such as:

  • Service costs - should be transparent so all parties are aware of how the costs are made up
  • Management fees - should be on a fixed-price basis with no hidden mark-ups
  • Occupier responsibilities - occupiers should ensure prompt payment of all bone fide on-account and balancing charges
  • ADR - all renewal and new leases should include ADR provisions in the event of a service charge dispute

Furthermore, Appendix A provides a compliance checklist and Appendix B contains the Standard Industry Cost Classifications (SICC). SICC is used to classify costs consistently across service charge management. Appendix C contains a service charge accounting sample report, whilst Appendix D provides guidance on handover procedures when a property is sold or the managing agent is changed.

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Stay tuned for our next blog post to help build a better you

N.b. nothing in this article constitutes legal advice.