Service charges: can I recover more than 100%?
I am the managing agent of an office building with retail premises on the ground floor and offices on the first, second and third floors. I have just issued the service charge budgets for the year ended 31 December 2019. The shop tenant has queried its contribution to the service charge, which the lease states is a “fair and reasonable proportion” as determined by the landlord’s surveyor. This has been determined at 33% of the total service charge expenditure. The tenant also says that it will not contribute to the costs of newly installed CCTV because such costs are not covered in its lease. I have checked the tenant’s lease and it does not appear to contain a right to recover the CCTV costs. I have also reviewed the service charge apportionments for the building, which are based on square footage, and the office tenant contributes 75%. What steps are required of me as a RICS member to address these queries?
Under the existing RICS code of practice, Service Charges in Commercial Property (third edition), best practice requires that no more than 100% of the actual costs incurred are recovered from the tenants, and recovery must be in accordance with the terms of the lease. Compliance with this guidance would prevent the apportionment that has been applied here because it exceeds 100% and may prevent recovery of the CCTV costs. Under the new RICS professional statement, Service Charges in Commercial Property, which comes into force on 1 April 2019, these elements of best practice are now mandatory requirements and RICS members must comply with them. Non-compliance will not impact on the tenant’s liability to pay service charges but may have regulatory and disciplinary consequences. You must comply with the new professional statement prohibiting recovery in excess of 100% of actual costs insofar as the terms of the lease allow. You must not recover the CCTV costs unless the lease contains a sweeper clause that is wide enough to encompass such costs.
The new professional statement will apply to RICS members and firms regulated by RICS, replacing the existing code of practice from 1 April 2019. It introduces mandatory requirements alongside existing best practice provisions. Members must not depart from the provisions of the professional statement. In respect of the best practice provisions, the RICS recognises that there may be exceptional circumstances in which it is appropriate for a member to depart from them.
In regulatory or disciplinary proceedings, the RICS will take into account the relevant professional statements in deciding whether a member acted professionally, appropriately and with reasonable competence.
The professional statement includes the following mandatory requirements that are relevant to your question:
1. All expenditure that the 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 the services, unless the percentages in the lease are fixed.
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.
Crucially, the professional statement cannot override the terms of the lease itself and a failure to comply with the professional statement does not negate or limit the tenant’s liability to pay service charge under the lease.
Under the existing code of practice, it is best practice that recovery of service charge contributions is made in accordance with the lease (Core Principle 14 and paragraphs 4.2.1 and 4.2.2 of section 2) and a manager must not recover more than 100% of the total service charge costs (Core Principle 2 and paragraph 4.7 of section 2).
Under the new professional statement, from 1 April 2019, the manager will not, in accordance with the new mandatory requirements, be able to pass on the CCTV costs to the tenant because the lease does not provide for such recovery, unless there is a sweeper clause in broad enough terms to include it.
If the lease is a short lease then, pursuant to paragraph 4.4.3 of the professional statement, unless the lease incorporates clear wording to the contrary, the sweeper clause cannot generally be used as authority to recover a cost not contemplated when the lease was granted. In the absence of a clear sweeper clause, this cost will not be recoverable and the tenant should be told this as soon as possible and a revised budget should be issued.
As it stands, you would be recovering more than 100% of the costs because 75% and 33% cumulatively totals 108%. The determination that 33% is a “fair and reasonable proportion” should be reviewed and consideration given to apportioning no more than 25% to that tenant. Alternatively, you should consider whether the terms of the leases allow for variation of the apportionment, in which case the lease should be varied so that the total recovery does not exceed 100%. If the lease does not allow for variation, you should explore whether the tenants will agree to a variation.
Finally, you will need to ensure that all future service charge budgets after 1 April 2019 are accompanied by appropriate explanatory commentary and an apportionment matrix, and that they are issued at least one month prior to the start of the service charge year. Within four months of the year end, you should issue detailed statements of actual expenditure, together with accounting policies and explanatory text (Core Principle 21).
The new professional statement should not alter your practices dramatically as many of the mandatory requirements are already best practice, but it will be important to familiarise yourself with it before 1 April 2019.
This article was written by Laura Bushaway, Knowledge Development Lawyer at Charles Russell Speechlys and Miriam Seitler, Barrister at Landmark Chambers.
News & Insights
Rich pickings for HMRC? The new UK tax rules on “property-rich companies”
The scope of UK tax for non-residents has been extended to catch gains on disposals of interests in “property-rich companies”.
Is it the end of the road for residential leasehold?
With the form of tenure under attack from various quarters, can it survive?