Consultation on 4th edition of the RICS Code of Practice for service charges in commercial property

Posted by Peter Lewis on
On 25 October, the Royal Institution of Chartered Surveyors (RICS) issued a consultation on the 4th edition of the RICS Code of Practice: Service charges in commercial property.

The consultation relates to a draft professional statement which sets out the best practice in the management and administration of service charges in commercial property. It is proposed that the new professional statement takes effect from 1 April 2018.   

RICS state that the aim of the professional statement is 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".  This code will also provide guidance to solicitors, clients and managers of service charges particularly in the negotiation, drafting, understanding and operation of leases, in accordance with best practice.

Under the proposed code, professionals involved in the management of service charge accounts must act in accordance with the following 8 new mandatory requirements:

  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 unless the lease of the property gives them the explicit right to do so.
  2. Owners and managers must ensure that service charge budgets, including appropriate explanatory commentary, are issued annually to all tenants.
  3. 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.
  4. Owners and managers must ensure that a service charge apportionment schedule for their property is provided annually to all tenants.
  5. All expenditure that the owner and manager seek to recover must be in accordance with the terms of the lease.
  6. Service charge monies (including reserve and sinking funds) must be held in one or more discrete (or virtual) bank accounts.
  7. 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.
  8. 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 location use and character of the property.

Although the proposed code cannot take priority over a lease, it may, if read in conjunction with the lease, enable users to identify the best way forward in interpreting a lease to ensure effective management of services.

The deadline for responding to the consultation is midnight of 6 December 2017. More information on the consultation and details as to how to respond can be found here

About the Author

Peter is a solicitor in the commercial real estate team within the Built Environment division, based in London.

Peter Lewis
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020 7814 5426

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