Consultation on the fourth edition of the RICS Service Charge Code (2007) – Commercial Property

With a consultation on the fourth edition of the RICS Service Charge Code (2007) underway, Darren Coleran, a partner at Bolt Burdon, reviews the proposed changes.

“A service charge is a means by which a landlord can recover from tenants the cost of maintaining and repairing the building and providing certain services. 

Given that the money comprising the service charge is usually formed of the contributions made by the tenants, there are often frictions in respect of how this money is spent.

In residential property there are more stringent and clear regulations in respect of service charge which historically, and to date, commercial property has not benefited from or been subject to.

The service charge regimes for commercial property are usually set out within the commercial lease relating to the particular property. Up until now there have been various external contributions and publications which have contributed the drafting of these regimes and how they operate in practice. One such publication being the RICS Service Charge Code (2007). This effectively sets out best practice and recommendations as to how the service charge regimes could be operated fairly and transparently. 

This code is now currently in its third edition with a consultation on the fourth, underway. The new edition of the code proposes going quite a bit further than simply setting out best practice, but rather imposes mandatory principles that surveyors will be bound to follow, including how such principles should be applied. It is proposed that the changes will take effect from 1 April 2018. 

The 8 mandatory principles (as well as other changes), are:

  • Owners and managers must not seek to recover more than 100% of the proper and actual costs of the provision or supply of services, unless expressly provided for in the lease
  • Owner 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 seek 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 proposed code also encourages practitioners to pay regard to 11 principles which support the mandatory requirements. The principles include communicating and consulting with occupiers in relation to the standard and quality of service charge and ensuring value for money in accordance with the appropriate locations use and character of the property.