Service Charges – Code of Practice (Commercial Property)
Are there any codes of practice for commercial property?
On 19 April 2019, the RICS Professional Statement “Service Charges in commercial property” was introduced which replaced the previous code of practice: “Service Charges in Commercial Property (third edition)".
The purpose of the Professional Statement is to improve general standards and promote best practice, uniformity, fairness and transparency in the management and administration of service charges in commercial property.
The Professional Statement introduces mandatory requirements alongside existing best practice provisions for RICS members dealing with commercial service charge matters. RICS members must not depart from mandatory provisions in the Professional Statement. In respect of best practice provisions, the RICS recognises that there may be exceptional circumstances in which it is appropriate for a member to depart from them.
What are the key principles?
It is important for RICS members to familiarise themselves with the provisions of the Professional Statement. It contains 4 aims and objectives, 9 mandatory requirements and 24 core principles supported by best practice.
The mandatory requirements are as follows:
- All expenditure that the owner and manager seek to recover must be in accordance with the terms of the lease.
- Subject to section 4.2.7, owners and managers must seek to recover no more than 100% of the proper and actual costs of the provision or supply of the services.
- Owners and managers must ensure that service charge budgets, including appropriate explanatory commentary, are issued annually to all tenants.
- 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.
- Owners and managers must ensure that a service charge apportionment matrix for their property is provided annually to all tenants.
- Service charge monies (including reserve and sinking funds) must be held in one or more discrete (or virtual) bank accounts.
- 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.
- 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.
- 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.
What happens if there is a breach of the Professional Statement?
For RICS members there may be disciplinary consequences for failure to comply with the Professional Statement. It is not technically binding on non-RICS members including landlords, tenants and their professional advisers but is usually best practice and is often relied upon or referenced by those parties if any disputes concerning the treatment of service charges arise.