12 August 2021

The Royal Institution of Chartered Surveyors (RICS) Service Charges in Commercial Property professional statement provides guidance to commercial landlords and tenants on service charges under a commercial lease. For members of the RICS and regulated firms it provides mandatory obligations that must be complied with.

What is a service charge?

The professional code defines a service charge as a cost incurred in order to deal with servicing and operating a property and to comply with landlord obligations under a commercial lease. It includes maintenance, repair and replacement of the property and its operations, and any other works or services agreed between the parties.

Mandatory requirements

The professional statement contains mandatory requirements which are considered to be the minimum acceptable standards of performance. They are as follows:

1. All expenditure must be in accordance with the terms stated within the lease.
2. No more than 100% of the service costs incurred must be sought to be recovered.
3. Annual budgets and an approved set of service charge accounts, with an apportionment matrix where applicable, and with appropriate explanatory comments must be issued to all tenants.
4. Service charge monies must be held in one or more discrete or virtual bank accounts, with any interest earned being accredited to the service charge account.
5. If a dispute over service charges occurs, any service charge payment withheld or deducted should only reflect the actual sums in dispute.

Principles

As well as the mandatory requirements, five ethical principles under the professional code are mandatory for any members; these are to act with integrity, provide a high standard of service, promote trust in the profession, treat others with respect and take responsibility.

Further, there are core principles to follow under leases. While the RICS acknowledges that in some circumstances strict compliance may not be possible, it has explained that they should only be departed from where there is a good reason to do so.

The core principles, in summary, are to ensure that costs are transparent, with management fees on a fixed price basis with no hidden mark-ups. This means that owners should not profit from any services provided. Costs should be allocated and apportioned to those who benefit from the services and the basis of apportionment should be reasonable. Landlords should communicate with their tenants to ensure services are delivered effectively and that owners understand what services they should receive and how much they should pay.

Additionally, landlords and managers must recognise that they have a duty of care to occupiers. Any account statements should be issued by experts, and alternative dispute resolution must be available under all leases. Communication between landlords and tenants should be timely and regular to promote good working relationships.

Finally, service charges must not include any initial costs incurred in design and construction, setting up or fitting out costs, improvement costs above the cost of normal maintenance, future development costs, service charges for void premises, or costs arising from the negligence of the manager or owner.

The professional code is flexible in that it recognises that the size, nature and type of property will affect the necessary service charges and amounts payable under a lease. It advises that nevertheless, all owners, managers and occupiers should aim to comply with the guidance at all times.

It is therefore important to understand how these principles apply to a specific lease in order to consider appropriate adherence. If you have any questions on the service charges you are requesting or are responsible for under a lease, please get in touch.

Lily Morrison, Trainee Solicitor: lmo@bto.co.uk / 0141 221 8012