29 December 2017 by

Good news for commercial tenants?

A service charge is the means by which a landlord can recover from tenants the cost of maintaining and repairing their building and providing certain services.

Given that the money comprising the service charge fund is usually made up of the contributions made by the tenants, there are often frictions in respect of how this money is spent.

In residential property there are stringent and clear regulations (including a statutory regime) in respect of service charges. Commercial property tenants have not been included in this regime.

Service charge arrangements for commercial properties are instead set out within the terms of the commercial lease. While the drafting of these service charge clauses can reflect external publications and guidance notes, they do not have to be used by landlords when drafting commercial leases.

One such guide has been the Royal Institute of Chartered Surveyors’ (RICS) Service Charges in Commercial Property (also known as the Code of Practice). Whilst this Code is now in its third edition, it has, to date, only set out best practice and has attracted criticism for lacking teeth because the Code is only a voluntary one.

The position however looks likely to change next year. There is currently a consultation on the fourth edition of the RICS’ Code of Practice underway. The new edition of the Code proposes going quite a bit further than simply setting out what should be the best practice on service charges to be followed by landlords. The new Code proposes mandatory principles that landlords and tenants and property professionals like solicitors and surveyors, would all be bound to follow. It is proposed that the changes will take effect from 1st April 2018.

The 8 mandatory principles in the RICS’ proposed new Code (as well as other changes) will include:

  • Landlords and managers must not seek to recover more than 100% of the proper and actual costs of the provision or supply of services, unless expressly provided for in the lease.
  • Landlords and managers must ensure that service charge budgets, including appropriate explanatory commentary, are issued annually to all tenants,
  • Landlords and managers must ensure that a signed statement showing a true and accurate record of the actual expenditure constituting the service charge is provided annually to all tenants.
  • Landlords and managers must ensure that a service charge apportionment schedule for their property is provided annually to all tenants.
  • All expenditure that the landlord and manager seek to recover must be in accordance with the terms of the lease.
  • Service charge monies (including reserve and sinking funds) must be held in one or more discrete (or virtual) bank accounts.
  • All 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. This applies, for instance, to bank charges, tax, etc.
  • Where acting on behalf of a tenant, RICS members must advise their clients that if a dispute exists then any service charge payment withheld by the tenant should reflect only the actual sums in dispute.

If these changes are made it is likely to have a considerable impact on the commercial property sector. To find out more about the proposed changes or other commercial property issues please contact our Commercial Property team here.

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