RICS Consultation on new regulation for Commercial Service Charge

On 25 October, the RICS launched a Consultation on a new RICS draft professional statement on Service Charges in Commercial Property. Comments on the Consultation must be received by the RICS by 6 December 2017. The new professional statement will be effective from 1 April 2018 and it supersedes the 3rd edition of the RICS code of practice: Service charges in commercial property.

The RICS continues to be concerned by the behaviour of certain landlords and managing agents in relation to the management and administration of commercial property service charge, especially, in one judge’s words, “those who act in a partisan spirit, supposing their only task is to recover as much money as they can for the landlord”.
Importantly, the RICS’s new professional statement has more serious regulatory implications for RICS members and regulated firms.

The current RICS code of practice promotes best practice, but RICS members are not required to follow its advice and recommendations. However, if an allegation of negligence is made against a member, a court is likely to take into account the code’s contents in determining whether the member acted with reasonable competence.

The new RICS professional statement is a step-up in terms of regulatory importance. It includes 8 new mandatory requirements (or core principles) for RICS members and regulated firms. Members must not depart from the requirements and there may be legal and/or disciplinary consequences for doing so. The requirements are:

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 professional statement also includes best practice principles under 11 headings. While the RICS acknowledges that in rare circumstances strict compliance may not always be possible, RICS members should only depart from best practice for justifiable good reason and the client may need to be informed.

The principles focus on matters such as:

• transparency of service costs;
• not profiting from provision of services;
• demonstrably fair and reasonable apportionment of costs between occupiers;
• using alternative dispute resolution to resolve disputes;
• ensuring value for money (as opposed to lowest price) is achieved at all times; and
• excluding certain items such as initial costs relating to the original design and construction.

Many of those matters reflect the current code of practice and there is no change to the timing for budgets and statements. Managers should issue budgets and explanatory commentary to occupiers at least one month prior to the start of the service charge year. Detailed statements of actual expenditure, together with accounting policies and explanation, should be issued within four months of the service charge year-end. Importantly, while this timing is best practice, it remains not mandatory.

The key focus of the new professional statement will be on the 8 core principles. However, this statement cannot override the terms of existing leases and a failure to meet the standards set out in the statement will not of itself negate or limit a tenant’s liability to pay service charge under the lease.

The increased regulatory importance of the proposed new statement should lead all parties to consider carefully its principles and, in particular, requirements before entering into new leases.

It should also encourage anybody involved with commercial service charge to pay close attention to the new document and respond to the consultation. The deadline is 6 December 2017.

Further details of how to respond to the consultation can be found here.