CoStar Column: RICS sets the service charge benchmark

By Guy Whitehead - Tuesday, October 09, 2018 11:45

Since the inception of the service charge code 22 years ago, RICS has been at the forefront of facilitating improvements to standards of service charge delivery and has set the benchmark for the commercial property sector to follow. The launch of the new professional statement ‘Service charges in commercial property’ which is effective from 1 April 2019 and has been produced in conjunction with some of the industry’s key bodies can be seen as an important step forward in regulating the actions of landlords and their agents whilst offering valuable protection for tenants at a time of well documented issues facing the retail industry, writes Guy Whitehead, an associate in the real estate team at Irwin Mitchell.

The aims of the statement are to:

• improve general standards and promote best practice, uniformity, fairness and transparency in the management and administration of services charges in commercial property;

• ensure timely issue of budgets and year-end certificates;

• reduce the causes of disputes, and to provide guidance on the resolution of disputes if these arise; and

• provide guidance to solicitors, their clients (whether owners or occupiers) and managers of service charges in the negotiation, drafting, interpretation and operation of leases, in accordance with best practice.

The key principles which professionals involved in the management of service charge accounts must act in accordance with are:

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 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.

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.

The statement acknowledges that service charges are an increasingly complex and challenging area of commercial property management which needs to evolve in line with changes to business practice and stresses the importance of transparency (so that all parties are aware of how for instance service costs are made up) and communication (so tenants understand what they can expect to receive and how much they are required to pay) in order to reduce the potential for disputes.

The statement provides detailed guidance on what constitutes best practice and highlights the following:

• Management fees should be set on a fixed-price basis rather than being calculated as a percentage of expenditure.

• Any inducements or concessions to attract occupiers to a property should be borne by the owner.

• Occupiers should be notified of any significant or material variances to the service charge forecast as soon as possible.

• Managers should issue budgets to occupiers at least one month prior to the start of the service charge year. Annual statements of expenditure should be issued within four months of the service charge year end.

• All new leases (including renewals) should make provision for either party to require the resolution of disagreements through alternative dispute resolution (ADR).

• MEES - any subsequent costs of improving energy efficiency might comprise a legitimate service charge item as long as there is a proportionate cost benefit to tenants.

 

The statement can be seen as a blueprint for landlords and their agents, especially those involved in the management of large shopping centres with significant tenant mix, to utilise with communication and consultation being key to reducing complaints and the potential for disputes.

 

From a tenant’s perspective, the statement can be viewed as a robust set of guidelines that should improve transparency and communication on how service charges are administered by landlords. Service charges represent a significant overhead for tenants and for this reason detailed due diligence should always be carried out before a tenant enters into a lease. Tenants should try to negotiate service charge caps where possible and ensure that a landlord is required to reimburse any overpayment that has been made when the lease comes to an end.

The challenge has been set for the industry to embrace the requirements set out in the statement.

Guy Whitehead is an associate in the real estate team at Irwin Mitchell

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