Commercial Control: Establishing Guidelines on Service Charges for Commercial Properties
With our considerable experience, specialism and success in service charge recovery, we recognise that there has been limited provision or guidance for commercial service charges. The Royal Institute of Chartered Surveyors (RICS) however, are seeking to address this with the introduction of the “Service Charges in Commercial Property, 1st Edition, September 2018".
Whilst not statutory, it is intended that this will have a more powerful impact then simply being a guide that you may or may not wish to use.
The main difference with this Code of Practice is that it provides mandatory requirements that must be adhered to by professionals involved in the management of service charge accounts, particularly by RICS members. The thinking behind the Code is that it will impact not only against RICS members, (if this is not implemented by them where there is ambiguity in the Lease) but will also affect the drafting of new leases, as well as serving as a judicial influence and point of guidance in disputes. Whilst, it remains to be seen how this will impact upon commercial leases what impact this will have, it is a significant attempt to influence the drafting of commercial leases as well as the disputes that arise between the parties.
Good News for Landlords, Management Companies and Managing Agents
The guidelines make it “mandatory “that any practitioners “must” advise occupiers to make "prompt payment" and impresses upon the occupiers that the service charge has “legal effect". It also endorses that “apportionment” of service charges should be “fair and reasonable”. Furthermore, that if there is a dispute with the Tenant, the RICS members must advise their client that they can only retain the disputed sum. However, again, this will be dependent on the terms of the lease, as most leases will state they cannot withhold payment of the service charge which has been demanded.
Some other of the mandatory requirements that the guidelines impose, (where there is no provision in the lease) are summarised below:
- “Owners and managers must seek to recover no more than 100% of the proper and actual costs of supply of services unless the lease states to the contrary”. It could be said that the majority already comply with this requirement.
- “Annual service charge budgets and explanations where appropriate to all tenants”
- It stipulates that owners and managers must provide the following on an annual basis:-
- Inclusion of “a service charge apportionment matrix”. This is a significant change.
- There is also reiteration of the condition that “All expenditure must be in accordance with the terms of the Lease” – which is largely a given.
- Recognising that budgets are something of a standard, we would note that some don't include explanations of some amounts in the service charge budget.
- An approved “set of service charge accounts showing a true and accurate record of the actual expenditure constituting the service charge”.
- The guidelines also highlight that “Service Charges monies must be held in one or more discrete (or virtual) bank accounts”*
Whilst interest is not something usually appearing in the accounts, this may change as a result of the Code of Practice. Also, with a substantial increase in "mixed use" developments, it should be considered that it may be difficult from a purely practical point of view to apply different interest rates for commercial units.
In short summary, whilst most managing agents will already be complying with the mandatory criteria, it is beneficial for them to check that the relevant part of the Code to their particular development is being adhered to as far as possible.
What else is significant?
There are also particular points to note covering aspects not usually dealt with in the Lease, including “Commercial Property Service Charge Handover Procedures" and provision regarding new leases. As regards new leases the guidance seeks to impresses that, where possible, the new terms in the lease should be adopted to reflect the Practice Statement.
In reality, however, it is likely that the terms of the lease will be governed by the parties and any new terms proposed regarding the service charges would be difficult to include in any new lease, as it would lead to a "dual” system of service charges which could be unsatisfactory for both the Landlord or Management Company and the Tenant.
In addition, we noted that on management fees, the guidance “requires that fees be set on a fixed price basis" as opposed to a percentage basis; however, it is worth highlighting that there is provision for an annual review of the fees or for them to be indexed linked. Further to this, that the total costs of the management fees are a reasonable price for managing the provision of services taking into account “location and operation of the services” along with the recommendation that asset management works and rent collection should be charged separately.
Putting this in context, with no statutory and current controls over Service Charges for commercial properties, it remains to be seen as to what impact this will have on commercial property disputes regarding service charges, particularly as the terms of the lease will still prevail; however, should a dispute arise or there is non- payment of service charges it is imperative to take legal advice at the earliest opportunity to ensure the Landlord’s or Management Company’s position is protected.
*(Virtual bank accounts - a subsidiary or sub-account of a physical bank account that allows segregation of funds)”