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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!

Mandatory CMP Schemes for Letting Agents and Property Managers

The Client Money Protection Schemes for Property Agents (Requirement to Belong to a Scheme etc.) Regulations came into force on 01 April 2019.  Under these regulations, all private sector letting agents and property managers in England who hold client money are required to be members of a government approved Client Money Protection Scheme (CMP Scheme) from the 01 April 2019 or face fines of up to £30,000.

Client money does not include tenancy deposits, which are protected under an approved tenancy deposit scheme.

These regulations give landlords and tenants the confidence that their money is safe, and that they will be compensated in the event of the monies being misappropriated or if the agent becomes insolvent. This is one of several legislative changes being introduced to protect customers against rogue letting agents and to regularise this industry.

These regulations only affect agents operating in England. Letting agents and property managers in Wales are already required to be a member of a CMP Scheme before they can obtain a license to operate in Wales.

Agents who belong to a professional body such as ARLA will already be members of a CMP Scheme.

In order to comply with the regulations, agents must:

(1) Be a member of an approved or designated CMP Scheme;
(2) If they’ve been provided with a certificate from the scheme administrator:
(a) Obtain a certificate confirming membership of the CMP Scheme;
(b) Display the certificate at the agent’s premises and on their website; and
(c) Produce a copy of the certificate to any person who may reasonably require it, free of charge;
(3) Notify all clients within 14 days if their CMP membership is revoked, or they change to a different approved CMP scheme; and
(4) Notify all clients of the name and address of the CMP scheme.

Financial Penalties for Non-Compliance and Right to Appeal

Every local authority in England is under a duty to enforce these requirements.

In respect of a breach of point 1 above, an agent can be fined up to £30,000.

In respect of a breach of points 2-4 above, an agent can be fined up to £5,000.

An agent can appeal against a decision to impose a penalty and the amount of the penalty.

Only one financial penalty may be imposed on the same property agent in respect of the same breach unless:

(1) the breach continues after the end of 28 days after the final notice is served and the agent hasn’t appealed the final notice within that period; or
(2) the breach continues 28 days after an appeal is finally determined (excluding the day on which the appeal is decided).

At the time of writing there are five government approved CMP Schemes:

(1) UK Association of Letting Agents (UKALA);
(2) Money Shield;
(3) Client Money Protect;
(4) Propertymark; and
(5) National Approved Lettings Scheme (NALS).

Agents will be required to pay an annual membership fee to join a CMP Scheme. The amount of the membership fee will vary depending on the sum of money that the agent holds from time to time.

Requirements vary from scheme to scheme, but the current approved schemes all require agents to:

(1) show that they have a designated client account in which to place client monies which is separate from their business account;
(2) Professional Indemnity Insurance; and
(3) Bank statements for the designated client account.

Are you already a member of a CMP Scheme? Have you had any problems joining a CMP Scheme?  As a letting agent/property manager operating in England, do you welcome these changes? Your comments are, as ever, welcome!

Updated ‘Fitness for Human Habitation’ Standard – Homes (Fitness for Human Habitation) Act 2018

The Homes (Fitness for Human Habitation) Act 2018 (‘the Act’) comes into force on 20 March 2019.

The Act introduces a new implied covenant in tenancy agreements (whether written in the agreement or not) that social housing landlords, private residential landlords, and agents acting on their behalf, must ensure that the property is fit for human habitation both at the beginning and throughout the tenancy.

These obligations extend to the property and all parts of the building (including any common or shared areas) in which the landlord has an estate or interest.

The Act gives tenants a direct cause of action against the landlord if the landlord fails to do the necessary maintenance. Prior to the Act, a tenant would have to rely on local authorities to challenge a landlord about the condition of their rented property.

Whilst the Act extends to England and Wales, its practical changes only affect properties in England.

The Act applies to any lease of a property of less than 7 years made on or after 20 March 2019.

The Act will initially only apply to new or reserved fixed term tenancies. It will apply to all periodic tenancies from the 20 March 2020.

Is Your Property ‘Fit for Human Habitation’?

It is ultimately for the courts to determine whether a property is fit for human habitation.

The question put to the courts is whether the property is so far defective in one or more of the following matters that it is not reasonably suitable for occupation:

  1. 1. Standard of repair;
  2. 2. Stability;
  3. 3. Freedom from damp;
  4. 4. Internal arrangement;
  5. 5. Natural lighting;
  6. 6. Ventilation;
  7. 7. Water supply;
  8. 8. Drainage and sanitary conveniences;
  9. 9. Facilities for preparation and cooking of food and for the disposal of waste water; and
  10. 10. Hazards prescribed in the Housing Act 2004.

Exemptions from the Implied Covenant

A landlord will not be held liable for breach of this implied covenant where a property is in an unfit state arising from certain instances including:

  1. 1. A tenant failing to use the property in a tenant-like manner;
  2. 2. The property is damaged as a result of a natural disaster (fire, storm or flood); or
  3. 3. Consent for works was requested but not obtained from a third party (i.e. superior landlord).

Consequences of Breach

This legislation is unlikely to affect most landlords who are already providing dwellings which are fit for human habitation; however, it is important that landlords ensure that they comply with these obligations as their tenants can now sue them directly if they don’t comply.

If the property is not fit for human habitation, the tenant has the right to bring a claim against their landlord for breach of contract and issue court proceedings against their landlord. It is possible that landlords could potentially be sued for damages for the entire length of the contract.

Next Steps

In order to ensure that you don’t fall foul of these obligations, the following best practices should be adopted by both landlords and letting agents:

  1. 1. Take photographic inventories at the start of the tenancy, during the tenancy (mid-term inspection), and at the end of the tenancy on check-out;
  2. 2. Landlords or agents should consider whether more frequent inspections are required to ensure the property remains fit for human habitation;
  3. 3. Keep a paper trail of all correspondence with the tenant relating to the repair and condition of the property (and use photos where possible to evidence the repair and condition);
  4. 4. Respond quickly and thoroughly to any requests, issues, or reports made by the tenant regarding the state of the condition of the property; and
  5. 5. In respect of common areas or other shared parts of the building owned by a third party, the landlord and/or letting agent should make sure these areas are kept in a state fit for human habitation.

Are you a landlord or letting agent? Are you concerned about the new powers the Act gives to tenants to sue landlords for breach of contract? Are there any steps or internal procedures that you will be adopting to ensure you do not fall foul of these obligations? Your comments are, as ever, welcome!

Brexit Notes: What will a No-Deal Brexit Mean for the Property and Real Estate Sector?

In answering this question, this post – the latest in our series of ‘no-deal’ Brexit Notes – will consider the impact of a no-deal departure from the EU on the legislative framework governing property ownership and transactions, as well as taking a brief look at the commercial impact on the property market.

Impact on the Legislative Framework

There has been minimal intervention from the European Union on the laws which govern how property is held in England and Wales. In short, leaving the EU will have little impact upon the legislation governing property ownership and transactions in England and Wales.

Some EU law does impact upon the way in which property is held in England and Wales, most notably the Energy Performance of Buildings Directive 2010 and the Energy Performance of Buildings (England and Wales) Regulations 2012 (EPB regulations), which implemented the EU Directive on the energy performance of buildings.

There will be a review of legislation which implements EU directives following our departure from the EU. It is unclear to what extent the UK government will depart from the EPB regulations and it is arguable whether indeed any change will be made to these regulations after Brexit. If any change is made it is unlikely to be made for some time whilst the UK Government addresses other more complex issues following Brexit.

Feeling Frustrated?

One other aspect that sellers or landlords need to be aware of, is whether Brexit is a ground upon which a buyer or tenant can argue frustration of a contract. If a contract is frustrated, it is incapable of being performed due to unforeseen events and consequently becomes void. A party to that contract would have to argue that at the time the lease or contract was signed, they had no idea that the UK would leave the EU and that the whole basis of their business and the contract was based upon the UK being an EU Member State.

There may be several reasons why a contract and/or lease cannot be performed as a result of Brexit.  This could be for regulatory, staffing, and/or financial reasons.

Individuals may also seek to get out of assured shorthold tenancies (ASTs) on the grounds of Brexit if, for example, their jobs cease to exist.

Commercial Impact on the Property Market

It is hard to predict what the impact will be on the real estate market due to the ongoing uncertainty of what Brexit will look like and the terms of our departure, which are to be agreed with Europe. There is likely to be some volatility. There is also a risk that a potential relocation of businesses from the UK to other countries is likely to affect supply and demand, which will impact upon pricing, and the property market will surely be affected by how the wider economy fares following our departure from the EU.

In summary, until there is some certainty as to the what the terms of Brexit will actually be, the impact upon the property market remains to be seen. There will be little impact upon the legislation governing property ownership and transactions in England and Wales, save for any regulations implementing EU directives, such as the EPB Regulations. What, if any, changes will be made to these regulations remains to be seen.

Are you a landlord or estate agent? Perhaps you are concerned about the potential impact of a no-deal Brexit on your commercial property? How are you preparing for Brexit? Your comments are, as ever, welcome!

Changes to SDLT Filing and Payment Time Limits

Stamp Duty Land Tax (“SDLT”) is a tax on land transactions payable on the purchase of land or property (including leases) over a certain price in England.

The time limit for filing an SDLT return with HM Revenue and Customs (“HMRC”) and paying any tax due to HMRC is being reduced from 30 days to 14 days for those property transactions in England with an ‘effective date’ on or after 01 March 2019.

The ‘effective date’ is the date of completion; however, it may be brought forward where a contract has been substantially performed, for example, when a tenant takes early occupation of a tenanted property.

Improvements will also be made to the information to be provided in the SDLT return, and these will be in place when the new time limit begins (01 March 2019).

The Welsh Land Transaction Tax (“LTT”) replaced SDLT in Wales in April 2018. Under the LTT, the time limit for filing the return and submitting a payment to the Welsh Revenue Authority is 30 days from the effective date of the transaction.

The SDLT rules and LTT rules are complex, with many exceptions, exemptions, and reliefs. If your transaction is not straightforward you should take specialist tax advice to ensure that you pay the correct amount of SDLT or LTT (whichever applies).

Fire Safety – Changes to Statutory Guidance – Approved Document B of the Building Regulations

Approved Documents are statutory guidance published by the Government on how to meet the Building Regulations for building work carried out in England only.

The Government has published changes to Approved Document B (Volumes 1 and 2) of the Building Regulations, which deals with fire safety. These changes come into force on 21 January 2019.

Approved Document B Volume 1 deals with dwellinghouses.

Approved Document B Volume 2 deals with buildings other than dwellinghouses.

The changes to Approved Document B seek to clarify the role of desktop fire safety assessments.

In the wake of the Grenfell Tower fire in 2017, a consultation took place in 2018 to consider whether the use of desktop assessments (in the absence of full fire safety tests) to assess fire safety regulatory compliance should be restricted or indeed banned entirely.

The amendments state that desktop assessments in lieu of tests are only to be used where necessary and are to be carried out in an appropriate way. Desktop assessments should not be used instead of tests where a test is necessary. Tests and assessments should be carried out by organisations with the requisite expertise and qualifications.

The Government has launched a Call for Evidence for a broader technical review on the guidance of fire safety (Approved Document B). Landlords, builders, developers, residents, and property managers are all invited to respond. The consultation closes on 1 March 2019.

Call for Evidence on Improving Building Safety

The Government has published a Call for Evidence – ‘Good practice on how residents and landlords/ building managers work together to keep their home and building safe’. Landlords, building managers, and residents are all encouraged to respond.

This Call for Evidence invites views on how residents and landlords/building managers work together to keep their buildings safe and ensure that all parties comply with their respective responsibilities.

The purpose of the Call for Evidence is to gather evidence to assess and examine the development of policy relating to resident and landlord/building manager engagement and collaboration in relation to fire and structural safety issues in the aftermath of the tragic event at Grenfell Tower. The aim is to ensure that there is a robust regulatory system for the future and to ensure that residential buildings are safe and remain so; however, it remains to be seen to what extent the Government will change the existing regime.

The questions are split into two sections, the first directed to residents, the second to organisations (landlords, building managers, and estate agencies, for example). Those who are both residents and landlords or managing agents should complete both parts of the questionnaire. Respondents are encouraged to respond through the online survey.

Responses must be given by 12 February 2019.

As a landlord or agent, do you find the existing regulations and arrangements allow you to manage fire safety risks in buildings effectively? Would greater collaboration between all parties involved make it easier to manage and ensure the safety of residential buildings?

Have your say in the Call for Evidence and share your thoughts with us below.

HMO Reforms From 1 October 2018

New rules relating to houses in multiple occupation (HMOs) apply from 1 October 2018. The key reform is the extension of mandatory licensing of HMOs. There are also new provisions regarding minimum room sizes and the management of household waste. Criminal and civil penalties can be imposed for non-compliance.

Extension of Mandatory Licensing

In simple terms, a house or flat is an HMO if it is occupied by three or more tenants who form two or more households and the tenants share some or all of the toilet, bathroom, or kitchen facilities.

Mandatory licensing applies to “large” HMOs, meaning those that are occupied by five or more people. A large HMO no longer needs to have three or more storeys to come within mandatory licensing.

Mandatory licensing will also now apply to purpose-built flats where there are up to two flats in the block and one or both are occupied by five or more people in two or more households. Each flat, if occupied as an HMO, will require a separate licence.

National Minimum Room Sizes

From 1 October 2018, HMO licences will specify which rooms in an HMO are suitable for sleeping accommodation, and by how many adults and children.

A room for a single adult or child aged 10 or over must have at least 6.51m2 of usable floor space. A room for two adults or children aged 10 or over must have at least 10.22m2 of usable floor space. A room with a usable floor area between 4.64m2 and 6.5m2 may be occupied as sleeping accommodation by a child under the age of ten.

Household Waste Management

For HMOs in England (but not in Wales), a licence granted on or after 1 October 2018 must include conditions requiring the licence holder to comply with any scheme provided by the local housing authority relating to the storage and disposal of household waste at the HMO pending collection. Schemes will vary from area to area but the idea is to require landlords to provide appropriate and sufficient refuse storage facilities for tenants.

Failure to Comply with HMO Legislation

There are serious consequences for landlords and letting agents who do not obtain licences for licensable properties, or who are in breach of licence conditions. These include unlimited fines for criminal offences, civil penalties of up to £30,000, rent repayment orders and, for persistent non-compliance, the possibility of a banning order being made against the landlord or agent. However, in relation to room sizes the local authority will allow landlords a period of time (up to 18 months) to rectify a breach.

How Do These Reforms Affect You?

Are you a landlord or tenant or local authority affected by these reforms? What steps have you had to take to prepare for 1 October? Will the new rules have the desired outcome of improving the standard of HMO accommodation? Please share your thoughts with us.

Reminder to Landlords and Agents – Section 21 Reforms Apply to All ASTs in England from 1 October 2018

On 1 October 2015 a prescribed form of Section 21 Notice was introduced for properties in England. Initially, use of the prescribed form was mandatory only for tenancies granted on or after 1 October 2015. From 1 October 2018, the prescribed form must be used to terminate all assured shorthold tenancies, regardless of when they were entered into.

Other rules were introduced on 1 October 2015 relating to the service of Section 21 Notices. These rules cover:

  • • Not serving a Section 21 Notice in the first 4 months of a tenancy
  • • Starting possession proceedings within 6 months of the date of service of the Section 21 Notice
  • • A ban on “retaliatory eviction”
  • • A requirement to provide tenants with a valid energy performance certificate, a current gas safety certificate and a copy of the publication “How to rent: the checklist for renting in England” published by the Ministry of Housing, Communities & Local Government.

Again, these rules originally applied only to tenancies granted on or after 1 October 2015. However, from 1 October 2018 they apply to all assured shorthold tenancies, even those granted before October 2015.

Landlords and agents should now ensure that all Section 21 Notices are drafted using the prescribed form of Notice and that the conditions mentioned above are complied with. For more information please refer to our Guidance on Section 8 and Section 21 Notices and our template Section 21 Notice for properties in England, available here on the Simply-Docs website.

Call for Evidence on Energy Performance Certificates

The government has published a Call for Evidence on Energy Performance Certificates for Buildings. Landlords, tenants and agents of both domestic and non-domestic properties are all encouraged to respond.

The government foresees an expanding role for Energy Performance Certificates (EPCs) as part of its drive to reduce building energy use. The Clean Growth Strategy 2017 set out an aim for homes in the private rented sector to be upgraded to EPC band C by 2030, and an aspiration for as many homes as possible to be upgraded to band C by 2035. In March 2018 the Green Finance Taskforce recommended that the government set a target for all commercial properties to meet EPC band B by 2035.

With these aims in mind, the Call for Evidence aims to collect evidence on the effectiveness of EPCs, to gather information on the suitability of the current system of EPCs for both their current and emerging uses, and to obtain feedback on suggestions for improvement.

The consultation document is 53 pages long and sets out the government’s take on how the EPC system is currently working and how it might be improved. Respondents are asked to answer 26 questions (on pages 44-46). Responses must be given by 19 October 2018.

As a landlord, tenant or agent, how are you finding the current EPC system? Have the new Minimum Energy Efficiency Standards had an impact on your business? What do you think about the proposals for the minimum standards to be higher? Have your say in the Call for Evidence and share your thoughts with us below.

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