We would like to place strictly necessary cookies and performance cookies on your computer to improve our website service.
To find out more about how we use cookies and how you can change your cookies settings, please read our  cookies statement.                
Otherwise, we'll assume you are OK to continue.   Please close this message

NEW: RICS Service Charge Code for commercial property - What are the key changes?

29 April 2014

The third edition of the Royal Institution of Chartered Surveyors (RICS) Code of Practice for Service Charges in Commercial Property (Code) was published on 4 February 2014 [1].

The Code sets out best practice guidelines for the operation of service charges in commercial property. Parties should observe the Code as failure to do so will be a relevant consideration if, for example, a manager is alleged to have been negligent in the performance of its management duties.

The Code also imposes duties on managing agents, legal advisers and occupiers (both landlords and tenants). There is increased pressure for all parties involved in commercial property to adopt the Code. Parties may ask for justification if the Code is not adopted.

Aims of the Code:

  • keep services charges fair, transparent and value for money
  • avoid service charge disputes
  • encourage green agenda.

The Code replaces the second (2011) edition with immediate effect. The second edition brought in substantial changes: it set out new aims and objectives of the Code and its core principles as well as providing more detailed guidance on best practice.

The third edition makes limited amendments to the second edition, the key ones being: 

Reduction in mandatory standards

The language of the third edition has watered down the standards expected of agents and occupiers. For example:

  • Principle 8: managers are now only 'advised' to consult occupiers about the expected standards of services (previously they 'must').
  • Principle  20: occupiers are now only 'urged' to be proactive in assisting owner in the operation of the services (previously they 'must').

A clearer definition of "value for money" (Principle 26)

The Code requires the manager and owner to provide services in a manner that achieves value for money and effective service, rather than simply providing the lowest price.

The definition has been improved and restated to mean "paying no more than is necessary for no less than is required". 

Service Charge Information and Communication Changes for Managers and Occupiers

Managers now have to:

  • issue a budget (previously only had to provide an estimate)
  • provide explanatory commentary, and
  • provide an explanation of the calculation of the occupier's proportion of the service charge.

Two new duties are also imposed on occupiers when challenging the budget:

  • the occupier (and any consultant appointed on its behalf) must conform to the principles of the Code, and
  • the occupier must disclose terms on which it appoints its service charge consultant (eg commission based).

Recoverable and Irrecoverable Costs

Recoverable Costs: the Code now states that certain types of contentious cost are generally not to be included in the service charge allowing greater freedom to include such costs. Previously the following costs were not allowed to be included: improvements that go beyond repair/maintenance, initial set up/construction costs and costs of letting void units, conducting rent reviews and enforcing tenant covenants.

Irrecoverable Costs: if the lease allows recovery of Carbon Reduction Commitment (CRC) costs, the following best practice should be observed:

  • administration and management costs should not be billed to the service charge
  • CRC costs should be apportioned between occupiers and between buildings in the landlord's portfolio in a fair, reasonable and consistent basis, clearly explained and capable of variation, and
  • owners have a duty of care to take steps to keep CRC costs down.

Sinking Funds

The Code now incorporates a separate RICS information paper on sinking funds (available through the RICS website). The British Property Federation and RICS made a joint application to HMRC to ask for clarification on sinking funds and to establish a preferred structure.

The Code encourages the use of such funds. If you have a sinking fund:

  • monies must be held separately on an interest bearing trust account
  • money should not be used to meet owners debt if the owner becomes insolvent
  • expenditure should be withdrawn in the year incurred
  • the balance should be paid to the successor in title to the landlord, and
  • there must be provision for who receives the occupier's part of the fund at the end of the lease.

Management Costs - new limitations

  • Asset management cannot be billed through the service charge
  • On site management should be shown as a separate cost
  • In house and managers should abide by the Code, and
  • If there are several layers of management the extra costs have to be fair, reasonable and value for money to be recoverable.


As stated above, much of the Code remains the same. However, it is important to be aware of the latest changes introduced by the third edition of the Code when negotiating Code compliant leases and managing service charges.

[1] RICS Code of Practice for service charges in commercial property

This article was written by Kate Baron.

For more information please contact Kate on +44 (0)20 7203 6696 or kate.baron@crsblaw.com.