Service charges in commercial property: new best practice

The Royal Institution of Chartered Surveyors (RICS) has this month published the first edition of its Professional Statement: Service Charges in Commercial Property.

The Professional Statement sets out best practice in the management and administration of service charges and it will apply to all service charge periods commencing from 1 April 2019, superseding the third (current) edition of the RICS Code of Practice on the topic. RICS members are not obliged to follow the current Code but the Professional Statement, on the other hand, includes mandatory requirements for RICS members/firms regulated by the RICS involved in the management of service charge accounts.

There are nine mandatory requirements

• All expenditure that the owner and manager seek to recover must be in accordance with the terms of the lease.
• Owners and managers must seek to recover no more than 100 per cent of the proper and actual costs of the provision or supply of the services.
• Owners and managers must ensure that service charge budgets and explanatory commentary are issued annually to all tenants,
• … must ensure that an approved set of service charge accounts is provided annually to all tenants
• … and that a service charge apportionment matrix is also provided annually.
• Service charge monies must be held in one or more discrete bank accounts.
• Interest earned on a service charge account must be credited to the account.
• When acting on behalf of a tenant, practitioners must advise their clients that if a dispute exists any service charge payment withheld by the tenant should reflect only the actual sums in dispute.
• When acting on behalf of a landlord, practitioners must advise their clients that following a resolution of a dispute, any service charge that has been raised incorrectly should be adjusted to reflect the error without undue delay.

These mandatory requirements are underpinned and supported by a set of core principles - for example that all costs should be transparent - and detailed best practice recommendations and guidance, including sample service charge reports.

The Statement is also intended to provide guidance on the negotiation, drafting, interpretation and operation of leases. However, it cannot override lease terms. One concern, therefore, is that RICS members may be stuck between a rock and a hard place if any of the mandatory requirements differ from contractual requirements in a lease.