Commercial Landlords: are your leases compliant with new RICS Commercial Service Charge Code?

Commercial landlord? Ensure your leases are compliant with new service charge provisions as RICS attempt to tackle unfair commercial lease practices.

RICS Commercial Service Charge Code comes into force 1 April 2019.

Leaseholds have received a lot of attention over the past 18 months, most of it negative. There is currently an ongoing government consultation and recommendations taking place in respect of residential leases considering principles of fairness, particularly in respect of the dreaded “doubling ground rent” provisions. Questions are being asked as to the fairness of such terms, especially given that they are in residential leases which are usually granted to the individual homeowner or investor.

What is classed as unfair in residential transactions is not necessarily classed as unfair in commercial, and the thinking goes that both sides of the transaction are (supposedly) commercially savvy to the point that parties are free to agree any deal they want. Despite this more laissez-faire regulatory attitude toward commercial transactions, RICS have now published a new professional statement on service charges in commercial property and what is to be fair practice. The “Service charges in commercial property (1st Edition)”, comes into force on 1 April 2019. It replaces the third edition of the Service Charge Code.

The statement sets out best practices in the management and administration of service charges in commercial property and provides mandatory obligations that RICS members and regulated firms must comply with.

There are nine mandatory obligations that must be followed by RICS members and regulated firms. The most significant echo the discussions on fairness currently taking place on leaseholds in general, such as:

1. Expenditure can be recovered only in accordance with the terms of the lease. Landlords should not recover more than the actual costs of providing the services (including reasonable management fees);
2. Tenants must be provided annually with service charge budgets (to include appropriate explanatory commentary), and approved service charge accounts and an explanation of service charge apportionments;
3. Service charge monies must be held in one or more discrete or virtual bank accounts with interest;
4. In case of dispute, tenants must be advised only to withhold the amount in dispute, not the full service charge payment;
5. When a dispute reveals that an error has been made, landlords must be advised to adjust service charges without undue delay.

There are also 24 core principles that underpin the mandatory obligations. The appropriate level of compliance with the core principles may be based on the professional judgment of all parties as to what is appropriate and reasonable in all the circumstances.

1. Service charges should be run in a transparent manner on an appropriate value for money basis. The aim is to achieve effective, value for money, service rather than merely the lowest price.
2. The basis and method of apportionment of service charge should be demonstrably fair and reasonable. It should ensure that individual occupiers bear an appropriate proportion of the total service charge expenditure and that this clearly reflects the availability, benefit and use of services.
3. Budgets are expected to be provided no later than one month before the service charge year begins. End of year accounts should be provided within four months after the end of the service charge year. Disputes about service charges should be resolved by alternative dispute resolution rather than through the courts. Timely and open communications and consultations about services are required.
4. Tenants should pay service charges promptly and be proactive in assisting landlords with the delivery of services.
5. There are particular costs that should not be recovered through the service charge. These include initial set-up costs, the costs of improvements that go beyond maintenance, repair and replacement, future redevelopment costs, the landlord’s own investment and asset management costs and costs relating to void premises.

The new statement will be welcomed by commercial tenants for the tightening to service charge provisions in commercial leases, especially for those lease transactions that are very one sided in bargaining power.

Property managers will want to ensure that they are familiar with the terms of the new statement so that they do not act in breach of its provisions and landlords will want to ensure that their leases are operable and drafted accordingly.

If you wish to find out more about service charge provisions, check your compliance, or are in need of advice on any commercial property related matter, our commercial property team can advise. Please contact us today on +44(0)151 294 4722.