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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 .
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:
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:
The language of the third edition has watered down the standards expected of agents and occupiers. For example:
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".
Managers now have to:
Two new duties are also imposed on occupiers when challenging the budget:
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:
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:
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.
This article was written by Kate Baron.
For more information please contact Kate on +44 (0)20 7203 6696 or firstname.lastname@example.org.