Service charges in commercial property – new code of conduct

Service charges can be a contentious issue.  Landlords and tenants have a shared interest in making sure the property is well maintained and managed but disputes are common.  New professional guidance for commercial property owners and managers, aimed at promoting best practice, comes into force in April 2019.  Maria Mowberry explains what landlords need to know about the new code.

“Some business tenants feel their landlords are less stringent in ensuring that services are efficient and offer good value than they would be if they were spending their own money,” says Maria Mowberry.  Residential service charges are heavily regulated, and commercial landlords have been threatened with similar legislation.  To avoid this, the Royal Institution of Chartered Surveyors (RICS) has produced a series of codes of conduct for its members.

The latest version is set out in a professional statement, which comes into force in April 2019.  Property managers and surveyors who are RICS members must comply with nine mandatory requirements in the statement; failure to do so will be a breach of their professional rules.  Landlords are not bound to follow the statement but if their surveyors and property managers are following it anyway, it will become widely used in practice.

The key aim of the statement is to improve standards and promote best practice in relation to commercial property service charges, encouraging greater fairness and transparency.

The mandatory requirements are:

• all expenditure that landlords seek to recover must be in accordance with the terms of the lease and must amount to no more than 100 per cent of the proper actual costs of the services;
• every year, tenants must be given a service charge budget which shows planned expenditure and a copy of service charge accounts showing what was spent;
• in a multi-let block or estate, landlords must give tenants a service charge apportionment matrix each year, to explain the proportion of the overall service charge paid by each tenant;
• service charge monies must be held in separate bank accounts and any interest earned must be credited to the service charge account; and
• where a dispute arises, RICS members must give fair advice, ensuring that tenants do not withhold more than any sum actually in dispute and that when the dispute is resolved, landlords are advised to refund any charge raised in error without undue delay.

The mandatory requirements are backed up by a set of core principles.  Although these are not compulsory, they reflect best practice in dealing with service charges. 

All costs should be transparent, so that everyone can see how money is being spent. Services should give value for money and, where appropriate, costs should be benchmarked or subject to competitive quotations.  Landlords may charge a reasonable commercial management fee that reflects the actual cost of managing services but should not seek to make a profit.

Allocation and apportionment of costs should be demonstrably fair and reasonable. Where one occupier benefits more from a particular service than others, the apportionment should reflect that.

There should be clear communication between landlords, managers and tenants, so tenants know what standard of service they can expect and how much they will be required to pay.  Landlords and managers should aim to be as transparent as possible, telling tenants promptly if they foresee any material changes from the initial budget.

When property managers issue accounts or certify expenditure, they should do so in a non-partisan spirit, acting as experts.  The statement of service charge expenditure should be independently reviewed.  In turn, tenants should make sure they pay promptly and help landlords to be efficient, for example, separating waste and adopting energy saving measures where asked to do so.

All new leases should contain an alternative dispute resolution mechanism for service charge disputes, avoiding the expense of going to court.

The services should be effective, give good value for money and be appropriate to the property.  Certain items should always be excluded from the service charge, such as the initial cost of building and equipping the property.  Improvements should also be excluded, although it is recognised that sometimes it may be more cost-effective in the long run to replace something with a more efficient alternative than to simply patch it up by piecemeal repair.

Do your current service charge provisions comply with the new code?

What if the service charge provisions of existing leases do not match the requirements of the statement?  The best practice guidance recommends that existing service charge provisions should be interpreted as far as possible in line with the statement – but what the lease actually says will prevail. 

As leases come to an end and new leases are granted, they should be updated to reflect the principles and practice in the statement.

To avoid being caught out, landlords should discuss the statement with their solicitors and review their leases, so that any changes in practice will be ready to go when the new rules come into force.

For further information, please contact our commercial property team on 01753 279064 or email comproperty@bpcollins.co.uk.