New RICS Code of Practice relating to service charges in commercial property

Effective from 1 April 2019.

The Royal Institution of Chartered Surveyors (RICS) professional statement relating to service charges in commercial property; and published in September 2018, becomes effective. The statement replaces the third edition of ‘the RICS Code of Practice: Service charges in Commercial Property’; and provides mandatory obligations, core principles and best practice recommendations that RICS members and firms regulated by RICS must comply with. The new RICS Code of Practice statement is an important step towards a fairer, more modern and flexible approach in property management. RICS states that there may be legal and/or disciplinary consequences for members departing from the Statement; which may lead to a finding of negligence against a surveyor.

The statement seeks 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 as well as year-end certificates;
• reduce the causes of disputes, and to provide guidance on the resolution of disputes if these arise; and to
• provide guidance to solicitors, their clients (whether owners or occupiers) and managers of service charges.

The statement does not override the service charge terms of an existing commercial lease. If RICS members depart from the best practice recommendations set out in the statement, they should only do so for justifiable reasons. Currently, the majority of commercial leases do not refer to the ‘old’ RICS Code; this is because landlords rarely wish to have to comply with a code that is not mandatory. The mandatory nature of the new statement, however, will mean that any RICS surveyors will have to comply with the statement and will have to interpret the lease in such a way that does not depart from the obligations, principles and best practice recommendations. This may also mean that tenants will be pushing landlords to refer to the statement when negotiating leases.

The statement sets out nine mandatory requirements that represent an acceptable standard of performance for RICS members as well as regulated firms. Some of the examples of the requirements are:

• All expenditure that the owner and manager seek to recover must be in accordance with the terms of the lease.
• Subject to section 4.2.7 of the statement, owners and managers must seek to recover no more than 100% of the proper and actual costs of the provision or supply of the services. (note: section 4.2.7 of the Best practice to support the core principle states that in some cases the overall service charge costs may be fixed and may be greater than 100% of the actual cost).
• Owners and managers must ensure that service charge budgets, including appropriate explanatory commentary, are issued annually to all tenants.
• Where 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.

The mandatory obligations are supported by 24 core principles, which deal with:

• The service costs
• Allocation and apportionments
• Communication and consultation
• Financial competence
• Occupier responsibilities
• Right to challenge/alternative dispute resolution (ADR)
• Timeliness
• Transparency
• Value for money
• Exclusions

RICS acknowledges some principles may be difficult to quantify and in rare circumstances, strict compliance may not be always possible. The appropriate level of compliance may be based on professional judgement regarding what is appropriate and reasonable in the circumstances.

Best practice recommendations help RICS members and regulated firms achieve mandatory requirements. RICS states that the extent to which owners and managers should seek to comply with the recommended best practice procedures will often depend on a variety of issues; such as the size, nature and type of property, the aggregate of the total service charge costs and the amounts payable by occupiers. Nevertheless, any departure from these recommendations is permitted only if it is justifiable to do so. Otherwise, RICS expects its members and regulated firms to comply with them.

Taken from an article published by Lexology on 1^st April 2019 and accredited to RadcliffesLeBrasseur