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RICS proposes mandatory service charge requirements

The Royal Institution of Chartered Surveyors (RICS) has launched a consultation on a new draft professional statement, setting out best practice in the management and administration of service charges in commercial property. The draft statement (82-page / 1.52MB PDF), which would be effective from 1 April 2018, supersedes the 3rd edition of the RICS code of practice on Service Charges in Commercial Property. It also provides guidance on technical issues such as the way property owners or managers should hold service charge monies.01 Nov 2017

The current RICS code contains principles for best practice, however the new professional statement contains eight mandatory ' core principles' which must be complied with by RICS members and regulated firms. At the top of the list, and repeated throughout the document, is the principle that property owners and managers must seek to recover no more than 100% of the actual costs of service provision, unless the property lease gives them the right to recover more.  

The draft professional statement requires service charge budgets to be issued annually to all tenants, and for a signed statement of the expenditure constituting the service charge. A service charge apportionment schedule must also be sent to all tenants annually. 

Owners and managers will have to hold service charge monies, including any reserve or sinking fund, in one or more discrete or virtual bank accounts. Any interest earned on service charge accounts must be credited to the account after appropriate deductions such as bank charges or tax have been made.

RICS members acting on behalf of a tenant must also advise 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 principles for best practice under 11 headings, many of which also feature in the 3rd edition.  Importantly, there is no change to the timing for budgets and statements, and the rules in respect of timing remain non-mandatory.

Property dispute resolution expert Alicia Foo of Pinsent Masons, the law firm behind Out-Law.com, welcomed the consultation.

“The previous service charge codes have been a product of co-operative collaboration and ongoing discussion between various representative bodies of the landlord and tenant communities," she said. "The new professional statement is a further helpful step along the way to hopefully reducing disputes between landlords and tenants."

"Elevating the current best practice principles in the existing Service Charge Code to mandatory status for RICS members demonstrates the prominence of this oft disputed area to all parties concerned. Those at the sharp end of such disputes, whether landlord owner or tenant occupier, should take the opportunity to comment on the consultation," said property dispute resolution specialist Nida Khan of Pinsent Masons.

RICS global property standards director Paul Bagust said some commercial property leases stated that a tenant will pay “a proportion” of the cost of services, which made it difficult to challenge service charges.

“Our new guidance will offer best practice on ensuring occupiers are given clear and concise information on all of the service charges they can expect to pay. So, it will help to better protect both landlords and tenants by avoiding costly – and often devastating - disputes over what can be a substantial business overhead,” said Bagust.

The consultation closes in December.