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Mandatory Requirements: RICS Service Charges In Commercial Property – Professional Statement Effective From 1st April 2019

10th April 2019

This professional statement sets a marker for the standards of management required in commercial property and provides mandatory obligations that RICS members and regulated firms engaged in this area must comply with. It has been endorsed by property bodies representing all sides of the property industry and widely acknowledged as a significant step forward for the property industry. This is effective from 1st April 2019.

The aims and objectives of this professional statement are 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 and year-end certificates
  • reduce the causes of disputes and to provide guidance on resolution, and
  • provide guidance to solicitors, their clients (whether owners or occupiers) and managers of service charges in the negotiation, drafting, interpretation and operation of leases, in accordance with best practice.

The nine mandatory requirements set out in the professional statement are as follows:

  1. All expenditure that an owner and manager seek to recover must be in accordance with the terms of the lease;
  2. Owners and managers must seek to recover no more than 100% of the proper and actual costs of the provision or supply of services;
  3. Owners and managers must ensure that service charge budgets, including appropriate explanatory commentary, are issued annually to all tenants;
  4. Owners and managers must ensure that an approved set of service charge accounts showing a true and accurate record of the actual expenditure constituting the service charge are provided annually to all tenants;
  5. Owners and managers must ensure that a service charge apportionment matrix for their property is provided annually to all tenants;
  6. Service charge monies (including reserve and sinking funds) must be held in one or more discrete (or virtual) bank accounts;
  7. Interest earned on service charge accounts – or where separate accounts per property are not operated, a proper and reasonable amount of interest calculated on normal commercial rates – must be credited to the service charge account after appropriate deductions have been made;
  8. 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;
  9. When acting on behalf of a landlord, practitioners must advise their clients that following 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 represent what is considered to be an acceptable standard of performance for RICS members and regulated firms. To provide a service that represents best practice in the management of service charges, practitioners should fully read this statement, which contains advice on RICS expectations on the implementation of the core principles and how to adhere to the mandatory principles.

Existing Lease Terms:

This professional statement cannot override the lease but, if read in conjunction with it, can enable users to identify the best way forward in interpreting the lease to ensure effective management of services. This professional statement sets out specific mandatory requirements for RICS members and there may be legal and/or disciplinary consequences for members in departing from professional statements, which may lead to a finding of negligence against a surveyor. However, subject always to the terms of the lease, a failure to meet the standards set out in the professional statement will not of itself be sufficient to negate or limit an occupier’s liability to pay a service charge in accordance with the terms of the lease. As business practice constantly evolves, so it is with service charges. Negotiating a new lease, or the renewal of an existing lease, provides an ideal opportunity to ensure that modern and flexible best practice service charge clauses are incorporated within the lease contract to facilitate effective management of the property and aid the relationships between the parties. An alternative dispute resolution (ADR) clause will enable any difficulties during the term of the lease to be resolved efficiently and with reduced cost. All parties should carefully consider the principles and requirements of this professional statement prior to entering into a new or renewal lease.

For more information regarding any of the above or to find out how Rory Mack Associates can help with all aspects of commercial (and residential property management), please call us today on 01782 715725.