Commercial property update - November 2011

Welcome to the November edition of the Commercial Property update from John Hawkins.   

This month I look at the new RICS Service Charges Code.

Second Edition of the RICS Code of Practice on Service Charges in Commercial Property

This came into effect on 1 October 2011 and sets out best practice in the administration of service charges. 

RICS members will be aware that compliance is not compulsory although in some circumstances, failure by an RICS member to adopt its principles may be indicative of negligence.  It is therefore hoped that the Code will be observed, particularly as it has been endorsed by the property industry and owner and occupier representative bodies.

The new Code directs the parties to a proposed lease to carefully consider and apply its contents before entering into a new or renewal letting.

The Second Edition is somewhat less proscriptive than the First Edition in that it makes it clear that it may not be necessary to apply the Code in full where the nature of the property, level of service charge or indeed types of services make full compliance inappropriate.  This would particularly apply to smaller properties or those with relatively low service charges. However, the principles do still need to be considered as a reasoned result is required.

The Code mostly refers to obligations binding on property managers including managing agents but also applies to the landlord and in house managers or a management company.  Surprisingly, the Code also seeks to impose obligations on the tenants and in particular, to pay service charge contributions promptly.

Detailed Service Charge Costs Provisions

The fundamental principle of the Code is that service charge costs should be divided between tenants according to the availability, benefit to individual tenants and actual use of services.  Floor area apportionment is stated as being appropriate.  In particular, the landlord under the Code must pay the service charge apportioned to empty units together with any shortfall arising out of concessions granted to individual tenants.

Review of Costs of Service Charges

The Code does not require re-tendering every 3 years but the costs should still be reviewed on a regular basis.  The costs which should not be included in a service charge account are detailed and in particular, these include those incurred in the initial construction and fitting out of the property and the cost of improvements which extend beyond repairs (unless of course they are more cost effective than carrying out the repairs).

The service charge accounts are required to be produced within 4 months of the year end together with an explanatory statement including certain specified information. 

Projection of Service Charge Balances

The new Code now requires all managers of the properties including the landlord to keep the service charge monies in a separate bank account apart from the general account.  Professional managing agents have, of course, for some time been required to do this in any event.

Note:  This is provided for general information and not as legal advice.