UK: Service charges in commercial property new code

Last Updated: 10 August 2006
Article by Mark Heighton

A revised service charge code for the industry was launched in June by the Royal Institution of Chartered Surveyors. It contains much more detail than the previous 2000 version and (unlike previous versions of the code) has been given the status of a guidance note by the RICS in order to recognise how important service charges are in todays property market and therefore is regarded as best practice.

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A revised service charge code for the industry was launched in June by the Royal Institution of Chartered Surveyors. It contains much more detail than the previous 2000 version and (unlike previous versions of the code) has been given the status of a guidance note by the RICS in order to recognise how important service charges are in today’s property market and therefore is regarded as "best practice".

The revised code has been given a lead in period so that it will come into effect for service charges commencing on or after 1 April 2007. It has been specifically designed for larger properties and if it is to be used for smaller properties this will require managers and occupiers to apply common sense as to the scale and applicability of the code.

The code has been endorsed by the BPF, BRC, BCO, BCSC and PMA. This new code aims to:

  • deliver a budgetable and forecastable part of occupiers’ overheads;
  • ensures service charges are "not a profit not for loss" and that are cash neutral to the owners income stream;
  • encourage transparency and communication in the relationship between landlords and tenants; and
  • remove service charges as an area of conflict.

The code will be used in 3 different situations. The first is when negotiating new leases. It is hoped that new service charges clauses in leases will specifically require adherence to the code. The second relates to lease renewals. Again it is hoped that (so far as is permitted by law) that renewed leases will be brought up to the standard as set out in the code. The third occasion in which the code will be used is in existing service charge clauses where it is hoped that these will be interpreted as far as possible in line with the principles and practices set out in the code, unless the lease specifically stipulates a different approach which therefore has legal force.

The code recognises that the areas that have caused most problem in the past relate to communication between property managers and users and the need for transparency in the accounting procedure. By being transparent both in the accounts and explanatory notes, the property manager will prevent disputes. Specific requirements of the code include:

  • a right for each occupier to challenge the propriety of expenditure where reasonable;
  • the owner will inform occupiers of the plans for the property in so far as they have an implication on the service charge;
  • regular meetings will be held with occupiers and a clear communication structure will be maintained;
  • when substantial works are planned, summary details of the results of tenders and the process gone through will be communicated to the occupier;
  • the manager will issue budgets to occupiers with an explanatory commentary at least one month prior to the start of the service charge year and reconciliations following the year end to all users within 4 months of year end;
  • service charge costs will not include such costs which are matters between the owner and an individual occupier for example enforcement of covenants for collection of rent and any costs arising out of the failure/negligence of the manager or owner;
  • the fee for the management services is the reasonable price for the total cost of managing the provision of the services at the location. This total price will not be linked to a percentage of expenditure. The total price will be a fixed fee for a reasonable period of time for example 3 years;
  • apportionment of costs to each occupier will be fair and reasonable and applied consistently throughout the property having regard to the physical size, nature of use and benefits to and use by the occupiers;
  • occupiers will not be charged through the service charge towards the costs attributable to unlet premises;
  • where services are provided for the benefit of specific occupiers only, these costs will be allocated only to the specific occupiers that benefit from them.

The terminology in the code requires managers to comply with the 86 parts of the code. The emphasis of the code is on communication and transparency and it is recognised that there are a number of issues on which more research is required. For example the steering group has recognised that the constraints of the lease renewal procedure under the Landlord and Tenant Act 1954 may cause problems to those hoping to get the code implemented. Also it is recognised that apportionment of service charges on mezzanine floors can cause problems and the steering group is calling for market research to be carried out as to what happens in practice in this area.

Finally it is important that the notes have been given the status of a guidance note. This means that the code is intended to embody "best practice". Although practitioners are not required to follow the advice and recommendations contained in the code it provides a security blanket when it comes to cases of professional negligence. Where an allegation of professional negligence is made against a practitioner, the court is likely to take account of any relevant guidance notes in deciding whether or not the surveyor acted with reasonable competence. It does not mean that a practitioner will be adjudged negligent if he has not followed the practice recommended in the code nor that he is free from negligence if he does follow the code. However where practitioners do depart from the practice recommended in the code they should only do so for good reasons.

Please click here for link to new code.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 08/08/2006.

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