New RICS Service Charge Statement
13 March 2019
The RICS Professional Statement, Service charges in commercial property 1st edition, which supersedes the previous three Codes of Practice, was published in September 2018 and is effective for all service charge periods commencing from 1 April 2019. The new Statement has been endorsed by property organisations representing those from across the property industry and applies to the whole of the UK (although highlighted within the Statement are circumstances where different conditions may apply to Scotland and Northern Ireland).
Driven by the motivation to tackle the exploitation of tenants by landlords who adopt unfair and vague service charge regimes, the Statement contains the following nine mandatory requirements:
1. All expenditure that the owner and manager seek to recover must be in accordance with the terms of the lease;
2. 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; and
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.
Core principles and best practice guidance
These mandatory requirements are supported by 24 core principles and best practice guidance, which focus heavily on transparent communication between all parties to ensure high standards and to encourage maintenance of positive relationships. The former, along with the mandatory requirements, are the key regulatory element for surveyors acting for landlords or tenants.
The Statement as a whole aims to, amongst other objectives, ensure timely issue of budgets and year-end certificates, provide guidance around the resolution of disputes and give advice on technical matters such as the way service charge monies are held. The elevated status of the document (due to RICS’s increasing regulatory importance), as well as its guidance to solicitors, their clients and managers of service charges during negotiation, means that the Statement is expected to have an impact on lease drafting going forward.
How will it impact on the landlord and tenant relationship?
Not all landlords will necessarily welcome the increase in resources that will need to be allocated to complying with the additional requirements, particularly those who do not currently provide much in the way of clarification to their tenants. One of the core principles creates an onus on managers to issue budgets to tenants, including explanatory commentary and apportionment matrix, at least one month prior to the start of the service charge year. It is, however, envisaged that the Statement will be well-received by commercial tenants, in particular those in multi-let properties.
It is important to recognise that not all of the obligations within the Statement fall on landlords – note the eighth mandatory requirement regarding practitioners acting for tenants. It is also worth noting that the Statement cannot override the terms of an existing lease, nor will a failure to comply negate or limit a tenant’s liability to pay service charge under the lease.
With the above in mind, RICS surveyors and regulated organisations are expected to comply with the whole Statement, not just the mandatory obligations. Departure from the best practice requirements should only occur in “exceptional circumstances” and for justifiable reasons, without which there may be legal and/or disciplinary consequences and may lead to a finding of negligence against a surveyor.
The Statement does, however, acknowledge that some of the core principles are more difficult to quantify than others, leaving it to the professional judgement of the parties as to the appropriate and reasonable level of compliance considering the circumstances. There are ultimately a number of variables that will determine the extent to which the best practice recommendations can be complied with, including the size, nature and type of property, the aggregate of the total service charge costs and the amounts payable by individual occupiers. Whilst this may relieve some of the concerns that RICS surveyors are likely to have regarding what happens if their client or employer fails to comply with the Statement, it is worth reiterating that a justifiable departure from compliance will be rare in practice.