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New service charges rules in commercial property



A new set of mandatory rules introduced from 1stApril 2019 and though the document itself is titled a first edition, itsupersedes 3 previous editions published as codes of practice.

The RICS (Royal Institution of Chartered Surveyors) says this'professional statement sets a marker for the standards of management requiredin commercial property and provides mandatory obligations that RICS members andregulated firms engaged in this area must comply with.'�

The new code has been endorsed by property bodies representingall sides of the commercial property industry and is, according to The RICS, 'widelyacknowledged as a significant step forward for the property industry.'�

The aims and objectives of the code are to:

  • improve general standards and promote bestpractice, uniformity, fairness and transparency in the management andadministration of services charges in commercial property
  • ensure timely issue of budgets and year-endcertificates
  • reduce the causes of disputes and to provideguidance on resolution, and
  • provide guidance to solicitors, their clients(whether owners or occupiers) and managers of service charges in thenegotiation, drafting, interpretation and operation of leases, in accordancewith best practice.

Published by Joanna Crofts of global property consultancyKnight Frank explains:

''�Industry guidance on service charges was first publishedin 1996 by the Royal Institution of Chartered Surveyors (RICS) and has becomeknown as the '�Service Charge Code'. Until now, this has only been guidance.But, that is about to change.'�

The new code sets out the mandatory requirements for landlordsand property managers - if they don't comply with them, they may face legal anddisciplinary action.

Advantages fortenants?

Making the guidance mandatory will make service chargesclear and transparent for all tenants '� rather than just to those whoselandlords followed the guidance as best practice.

For example, in the past, it wasn't set in stone who shouldbe responsible for paying for things like marketing events held in an officebuilding or a shopping centre. Now there's clear guidance that says thelandlord should contribute 50% towards the cost of such events, says JoannaCrofts.

Another example is, where a landlord has agreed a capped orfixed service charge as an incentive to secure a new tenant, the landlord mustpay for any shortfall, and not simply try to hide this and recover theshortfall from the other occupiers. The service charge matrix showing the basisfor recovery of costs must be completely transparent and disclosed, she says.

Service charges on different commercial buildings will nowalso be easier to compare. So, if you're looking for a property to lease orbuy, this will help you make the right decision on which premises to choose, inrelation to service charges.

The biggest change isfor landlords

The change that will have the biggest impact, says JoannaCrofts, will be the new mandatory '� much tighter '� timescales for budgeting andsettling service charge accounts. They now have to be reconciled annually.

'Until now, unless the lease states otherwise, there wasnothing stopping a landlord going back several years to recover costs owed.This can have a significant negative impact on a tenant's cash flow. Similarly,if too much time elapses, a landlord risks losing their chance to recover moneyowed because a former occupier may have since become insolvent,'� says JoannaCrofts.

If you are a landlord and are up-to-date with your servicecharge accounting, this won't be an issue but, if you have a backlog already,you really need to get up to speed now.

What has becomemandatory?

1. All expenditure that the landlord wants to charge formust be in accordance with the terms of the lease.

2. Landlords must recover no more than 100 per cent of thecosts of the provision of the services.

3. Annually, landlords must give tenants service chargebudgets, including appropriate explanatory commentary.

4. Annually, landlords must give tenants an approved set ofservice charge accounts showing a true and accurate record of actualexpenditure.

5. Landlords must give tenants a service chargeapportionment matrix for their property each year.

6. Service charge monies must be held in one or more discrete(or virtual) bank accounts.

7. Interest earned on service charge accounts must be paid intothe service charge account.

8. Practitioners must tell tenants that, if a disputeexists, any service charge payment withheld by them should only be the actualsum in dispute.

9. Practitioners must tell landlords that, following theresolution of a dispute, any incorrect service charge should be adjustedstraight away.

Acknowledgements Chris McColgan, Business News Wales

You can read and download '�Service charges in commercial property, 1st edition' on the RICS website here


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