New service charges rules in commercial property

Commercial:

A new set of mandatory rules introduced from 1^st
April 2019 and though the document itself is titled a first edition, it
supersedes 3 previous editions published as codes of practice.

The RICS (Royal Institution of Chartered Surveyors) says this
“professional statement sets a marker for the standards of management required
in commercial property and provides mandatory obligations that RICS members and
regulated firms engaged in this area must comply with.�

The new code has been endorsed by property bodies representing
all sides of the commercial property industry and is, according to The RICS, “widely
acknowledged as a significant step forward for the property industry.�

The aims and objectives of the code are to:

• improve general standards and promote best
  practice, uniformity, fairness and transparency in the management and
  administration of services charges in commercial property
• ensure timely issue of budgets and year-end
  certificates
• reduce the causes of disputes and to provide
  guidance on resolution, and
• provide guidance to solicitors, their clients
  (whether owners or occupiers) and managers of service charges in the
  negotiation, drafting, interpretation and operation of leases, in accordance
  with best practice.

Published by Joanna Crofts of global property consultancy
Knight Frank explains:

“…Industry guidance on service charges was first published
in 1996 by the Royal Institution of Chartered Surveyors (RICS) and has become
known as the ‘Service Charge Code’. Until now, this has only been guidance.
But, that is about to change.�

The new code sets out the mandatory requirements for landlords
and property managers – if they don’t comply with them, they may face legal and
disciplinary action.

Advantages for
tenants?

Making the guidance mandatory will make service charges
clear and transparent for all tenants – rather than just to those whose
landlords followed the guidance as best practice.

For example, in the past, it wasn’t set in stone who should
be responsible for paying for things like marketing events held in an office
building or a shopping centre. Now there’s clear guidance that says the
landlord should contribute 50% towards the cost of such events, says Joanna
Crofts.

Another example is, where a landlord has agreed a capped or
fixed service charge as an incentive to secure a new tenant, the landlord must
pay for any shortfall, and not simply try to hide this and recover the
shortfall from the other occupiers. The service charge matrix showing the basis
for recovery of costs must be completely transparent and disclosed, she says.

Service charges on different commercial buildings will now
also be easier to compare. So, if you’re looking for a property to lease or
buy, this will help you make the right decision on which premises to choose, in
relation to service charges.

The biggest change is
for landlords

The change that will have the biggest impact, says Joanna
Crofts, will be the new mandatory – much tighter – timescales for budgeting and
settling service charge accounts. They now have to be reconciled annually.

“Until now, unless the lease states otherwise, there was
nothing stopping a landlord going back several years to recover costs owed.
This can have a significant negative impact on a tenant’s cash flow. Similarly,
if too much time elapses, a landlord risks losing their chance to recover money
owed because a former occupier may have since become insolvent,� says Joanna
Crofts.

If you are a landlord and are up-to-date with your service
charge accounting, this won’t be an issue but, if you have a backlog already,
you really need to get up to speed now.

What has become
mandatory?

1. All expenditure that the landlord wants to charge for
must be in accordance with the terms of the lease.

2. Landlords must recover no more than 100 per cent of the
costs of the provision of the services.

3. Annually, landlords must give tenants service charge
budgets, including appropriate explanatory commentary.

4. Annually, landlords must give tenants an approved set of
service charge accounts showing a true and accurate record of actual
expenditure.

5. Landlords must give tenants a service charge
apportionment matrix for their property each year.

6. Service charge monies must be held in one or more discrete
(or virtual) bank accounts.

7. Interest earned on service charge accounts must be paid into
the service charge account.

8. Practitioners must tell tenants that, if a dispute
exists, any service charge payment withheld by them should only be the actual
sum in dispute.

9. Practitioners must tell landlords that, following the
resolution of a dispute, any incorrect service charge should be adjusted
straight away.

Acknowledgements Chris McColgan, Business News Wales

You can read and download ‘Service charges in commercial property, 1st edition’ on the RICS website here

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