160: At your service: new RICS Professional Statement to tackle unfair service charge practices

On 1 April 2019, the RICS professional statement ‘Service charges in commercial property (1st edition)’ (the Statement) comes into force.

Whilst industry collaborative guidance for the management of service charges in commercial property has been around since the latter half of the 1990s, the Statement goes further than previous service charge codes by incorporating a set of ‘mandatory obligations’ that RICS members and regulated firms must comply with.

RICS members can only deviate from best practices contained in the Statement when they have justifiable reasons.

What are the mandatory obligations?

There are nine mandatory obligations contained in the Statement that RICS members must comply with. These include:

• all expenditure that is to be recovered must be in accordance with the terms of the lease and they must seek to recover no more than 100% of the proper and actual costs of the services;
• each year all tenants should be provided with service charge budgets, including appropriate explanatory commentary. At the end of the service charge year they should also get an approved set of service charge accounts showing a true and accurate record of the actual expenditure constituting the service charge;
• service charge monies (including reserve and sinking funds) must be held in one or more discrete (or virtual) bank accounts;
• where acting on behalf of a tenant, they 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
• when acting on behalf of a landlord, they 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.

The mandatory obligations are underpinned by 24 core principles.

What is the purpose of the core principles?

The core principles (which are in turn underpinned by a series of best practices) are intended to help a party achieve the mandatory purposes obligations. The core principles include:

• all costs should be transparent so that all parties are aware of how the costs are made up;
• services are procured on an appropriate value for money basis, and that competitive quotations are obtained or the costs benchmarked; and
• owners should not profit from the provision or supply of services save for charging a reasonable commercial management fee that reflects the actual costs of managing the services.

The Statement acknowledges that strict compliance with some of the core principles may not always be possible. The appropriate level of compliance may be based on the professional judgment of all parties as to what is appropriate and reasonable considering all the circumstances.

Does the Statement override the service charge provisions of a lease?

No. The Statement is to be read in conjunction with the terms of a lease. The purpose of the Statement is to help to identify the best approach in interpreting a lease (particularly on areas where the lease is silent) to enable the effective management of services.

However, as the Statement cannot override the terms of a lease, its impact will be limited where a lease contains poorly drafted or problematic service charge provisions.

Comment

By incorporating mandatory obligations into the Statement, it will have a greater influence on the practical management of service charge regimes than the previous service charge codes, which merely provided guidelines for the management of service charge, without having any binding requirements.

New commercial leases that are entered into after 1 April 2019 should be drafted to ensure compliance with the Statement as it is anticipated that due to the mandatory obligations, the Statement will have a significant impact in resolving disputes that arise in relation to service charge management.