The new RICS service charge code and its potential impact on service charge provisions in new and existing leases.

Commercial service charges have the potential to be a highly contentious issue for tenants and landlords, with disputes often occurring in an increasingly complex area of commercial property management.

Industry guidance for the management and administration of service charges was first introduced nearly twenty-three years ago. Since its original inception in 1996, the Royal Institution of Chartered Surveyors (“RICS”) Service Charge Code (“the Code”) has had a profound effect within commercial property, with the original aim of promoting a fairer and more transparent industry standard. The Code offered a series of principles and requirements to ensure ‘best practice’; however these were not mandatory on RICS members or other parties.

The Code has now being published as a 1st Edition RICS professional statement, taking effect from 1 April 2019. Endorsed by the Law Society, it offers twenty-four core principles and nine mandatory requirements, which are to be used in conjunction with each other to influence the management and administration of service charges. The core principles underpin the mandatory requirements that RICS members and regulated firms involved in this area must comply with. Unlike the statutory protection that is afforded for residential tenants in relation to service charges, the new commercial service charge code is not mandatory for non-RICS members and some landlords may choose not to comply. However, these Landlords may find it harder to let their properties when faced with competition from properties or centres with more transparent service charge regimes. Proper and effective drafting of service charge provisions is therefore increasingly important for landlords and tenants in facilitating their commercial goals.

The new mandatory obligations are effective from April 2019.

They are as follows:

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

As with the previous service charge code, these new changes cannot override an existing lease. However, as a result of the increased regulatory prominence of these mandatory obligations, all parties should carefully consider the professional statement prior to entering into a new or renewal lease. The Commercial Property team at Mundays are ready to advise you with respect to service charge provisions in leases, as well as general guidance on commercial leases and other property transactions.

Michael Nixon is a partner within our Commercial Property department and Thomas Healy is a trainee solicitor.

The contents of this update are intended as guidance for readers. It can be no substitute for specific advice. Consequently we cannot accept responsibility for this information, errors or matters affected by subsequent changes in the law, or the content of any website referred to in this update.

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