On 4 May 2011 the Royal Institution of Chartered Surveyors (“the RICS”) published the second edition of the Code of Practice for Service Charges in Commercial Property (“the Code”). This replaces the first edition published in 2006. The Code seeks to promote best practice and transparency in the management and administration of service charges in the commercial market.
Who does the Code affect?:
- Landlords
- Tenants
- Managing Agents
- Legal Advisers
- Accountants
- Contractors who provide services.
Jurisdiction:
The Code applies to commercial properties situated in England and Wales although properties in Scotland have their own service charge code introduced in 2007, the RICS Code of Practice: Service Charges in Commercial Property (Scottish Edition).
What types of property are affected by the Code?:
Commercial properties, although residential properties have their own service charge code, the RICS Code of Practice for Service Charge Management (residential properties).
When does the Code come into effect?:
1st October 2011.
Is compliance with the Code compulsory?:
No, compliance is voluntary although it is possible that the courts may use this as a benchmark of “recommended practice” when considering service charge disputes.
What’s new?:
Some of the key provisions are as follows:
- Improve communication: communication between the parties is key to ensuring the smooth running of the owner/occupier relationship. Occupiers should be consulted by the owners regarding the standard and quality of the services to be provided although the owner will ultimately decide what the standard is to be. The owner should communicate with the occupier so that the occupier knows what services are to be provided and what this will cost.
- No profit: the amount of service charge recovered by an owner should be limited to the proper actual cost incurred in providing or supplying the service with there being no mark up or profit on the cost passed to the occupier. Any management fee should be a reasonable fixed sum as opposed to a percentage of the service charge.
- Allocation and apportionment: the apportionment of service charge is to be fair and reasonable taking into account the availability, benefit and use of the services.
- Financial competence: the service charge accounts are to be certified by the owner as being a true and accurate record of the expenditure recoverable under the lease. In addition the Code imposes a higher degree of competence and professionalism on the owner than the 2006 code in the preparation of service charge accounts. This may mean having to use more experienced staff.
- Occupiers’ responsibilities: not all the changes are weighted against the owner. The occupier is to pay the service charge promptly and may only withhold those parts which are legitimately disputed. In addition the occupier should appoint someone to attend service charge meetings who has authority to make decisions.
- Dispute Resolution: all new leases should allow either party to refer a dispute to alternative dispute resolution (“ADR”) rather than court action. If the parties cannot agree on the person to conduct the ADR process, appointment may be made by the President of the RICS.
- Sustainability: in agreeing the service charge “owners and occupiers should have regard to the environmental impact of their operations.”
Whilst the Code cannot override existing lease terms, it should be considered when renewing or negotiating a new lease. If the Code potentially affects you or your business and you are unclear as to the steps you need to take please feel free to contact bto.
Contact
Manjit Hunjan