What landlords and their professional advisors need to know about the RICS new professional statement “Service Charges in Commercial Property”
Landlords of multi-let buildings can use service charge mechanisms in leases to recover running costs from tenants. From 1 April 2019, service charges are subject to mandatory requirements, with which certain professionals must comply. A landlord should be asking its professional advisors what they are doing to ensure its leases comply with the new rules and list all of the services and expenditure it needs to recover. Otherwise, landlords may be exposed to voids. In this article we summarise what landlords and their professional advisors need to know about the Statement.
The 9 mandatory requirements must be complied with. They key ones are:
- The landlord must ensure that service charge budgets are issued annually to tenants.
- The landlord must ensure that a set of service charge accounts showing an accurate record of the expenditure constituting the service charge is provided annually.
- The landlord must seek to recover no more than 100% of the proper and actual costs of the provision or supply of the services.
- All expenditure that the landlord seeks to recover must be in accordance with the terms of the lease.
- Service charge monies must be held in one or more discrete bank accounts.
- All interest earned on service charge accounts or otherwise a reasonable amount of interest must be credited to the service charge account.
The 24 core principles underpin the mandatory requirements and should only be departed from where there is a good justifiable reason to do so.
The standout principles are:
- New leases should make provision for either party to require the resolution of disagreements through alternative dispute resolution.
- Management fees should be on a fixed-price basis with no hidden mark-ups and all costs should be transparent.
- Managers should consult with occupiers regarding the standard and quality of service charge provision required.
The services tenants should not be charged for are:
- Costs and fees relating to rent collection and matters between the landlord and an individual tenant.
- Any improvement costs above the costs of normal maintenance.
- Future development costs.
Impact on leases
Although the Statement does not override existing leases, service charge provisions in existing leases are to be interpreted in line with the principles in the Statement unless the lease specifically stipulates a different approach.
The Statement also recommends that new leases reflect the Statement.
Consequences of breach
Subject to the terms of the lease, a failure to meet the standards set out in the Statement will not be sufficient to negate a tenant’s liability to pay a service charge in accordance with the terms of the lease. However, there may be legal and/or disciplinary consequences for departing from the Statement, which may lead to a finding of negligence against a surveyor.