Changes for service charges on commercial property
The fourth edition of the RICS code of practice for management and administration of service charges in commercial property is in its final stages before regulatory approval and is due to be issued as a professional statement. The changes come into effect in April 2019 to give adequate time for accounting procedural change.
The first edition was published in 2007 and it sets out the best practice for surveyors to follow in providing services and operating service charge accounts, with the intention of improving transparency and communication between the landlord and tenant, therefore reducing the risk of disputes arising.
The RICS remain concerned about the behaviour of certain landlords and managing agents. The aim is to formalise the code providing mandatory obligations for RICS members and the statement will set the highest standards in a sector that is becoming an increasingly complex and challenging area of commercial property management. Departing from the requirements may now have disciplinary and legal consequences.
The statement includes nine mandatory requirements for owner and managers summarised as follows:
1. All expenditure sought to be recovered must be in accordance with the terms of the lease.
2. Should not seek to recover more than 100% of actual costs of providing/supplying services.
3. Service charge budgets, including appropriate explanatory commentary, are to be issued annually to tenants.
4. Ensure a service charge apportionment matrix for the property is provided annually to tenants.
5. Any service charge monies must be held in one or more discreet or virtual bank accounts.
6. All interest earned on service charge accounts must be credited to the account after appropriate deductions are made.
7. 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.
8. When acting on behalf of a landlord, RICS members must advise their clients that any service charge raised incorrectly should be adjusted without delay.
9. While strict compliance may not always be possible, RICS professionals should only depart from best practice for justifiable reasons.
Accordingly, property owners and managers will need to ensure that they are familiar with the terms of the new code so that they do not act in breach of its provisions.