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RICS Professional Statement on Service Charges in Commercial Property

Commercial property agents who are members of the Royal Institute of Chartered Surveyors (RICS) or who are regulated by RICS (RICS’ Agents) will need to comply with the RICS Professional Statement ‘Service charges in commercial property (1st edition)’ (‘the Statement’) which came into force on 01 April 2019.

The Statement replaces the RICS Service Charge Codes which were previously only guidance around best practice for the operation of service charge in commercial properties occupied by more than one tenant. The Statement imposes mandatory requirements on RICS’ Agents which are supported by core principles.

RICS’ Agents who fail to comply with the mandatory requirements could face legal and/or disciplinary action, such as negligence claims, if they commit a repudiatory breach of these requirements. A RICS’ Agent can only depart from these requirements for justifiable reasons.

In short, the Statement aims to make service charge costs transparent, hold agents to account, and ensure that service charge budgets and end of year demands are issued in a timely manner.

Nine Mandatory Requirements

(1) All expenditure to be recovered from tenants must be in accordance with the lease;
(2) Owners and managers must not seek to recover more than 100% of the proper and actual costs of the services;
(3) Each year owners and managers must be provided with service charge budgets, including appropriate explanatory commentary;
(4) Service charge monies (including reserve and sinking funds) must be held in one or more discrete (or virtual) bank accounts;
(5) Interest earned on these bank accounts must be credited to the service charge account (after any necessary deductions have been made);
(6) Owners and managers must ensure that an approved set of service charge accounts (which have been certified by an appropriately qualified person) are provided annually to tenants;
(7) Owners and managers must ensure that a service charge apportionment schedule is provided annually to tenants;
(8) In respect of disputes when acting for a tenant, the manager must advise the tenant that if money is being withheld, it is only the amount in dispute which is being withheld; and
(9) In respect of an accounting error when acting on behalf of the landlord, managers must inform the landlord that the service charge has been raised incorrectly and will be adjusted without any undue delay.

The Statement vs the Lease

The Statement does not override the service charge provisions of an existing lease, however; the Statement is to be read in conjunction with the terms of an existing lease. The purpose of the Statement is to help to identify the best approach in interpreting a lease and is likely to assist in resolving disputes that may arise in relation to service charge management.

If a landlord will be engaging a commercial property agent to manage the service charge and they are a RICS’ Agent, then the lease should be compliant with the Statement and service charge provisions in new leases or renewal leases should be drafted by reference to the Statement.

The Statement may cause increased administration for landlord and RICS’ Agents who may need to make changes to their current accounting procedures. However, these changes are likely to be well received by tenants who are likely to benefit from increased transparency and communication as a result of these changes.

Are you a commercial landlord/property agent and do you welcome these changes? Your comments are, as ever, welcome!

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