New rules governing commercial property service charges come into force today.
In its ‘service charges in commercial property’ professional statement, the Royal Institution of Chartered Surveyors (RICS) introduces new mandatory requirements on all of its members and relevant RICS-regulated firms.
The new standards have the aim of ensuring charges are both fair on tenants and that there are no hidden costs, while covering the maintenance and upkeep of landlords’ properties. Consistency in practices will also make it easier for tenants to compare service charges on different commercial buildings.
Guidance on dispute resolution is also provided although it is hoped greater transparency and fairness in charges will reduce the causes of disputes.
Companies that breach their obligations face potential legal and disciplinary consequences.
In developing the statement, RICS worked with professional bodies and organisations from across the UK property sector, representing owners, occupiers and managing agents, including the Institute of Chartered Accountants in England and Wales (ICAW), the Law Society of England and Wales, the British Property Federation (BPF), BRC, BCO, PMA, Corenet, REVO and PMA.
What are the new rules?
The obligations are set out as core principles articulating the ethical and conduct standards to be adhered to. They replace the three previous editions and are applicable to all service charge periods starting from 1st April 2019.
- All expenditure that the landlord wants to charge for must be in accordance with the terms of the lease.
- Landlords must recover no more than 100 per cent of the costs of the provision of the services.
- Annually, landlords must give tenants service charge budgets, including appropriate explanatory commentary.
- Annually, landlords must give tenants an approved set of service charge accounts showing a true and accurate record of actual expenditure.
- Landlords must give tenants a service charge apportionment matrix for their property each year showing the basis for recovery of all maintenance costs.
- Service charge monies must be held in one or more discrete (or virtual) bank accounts.
Interest earned on service charge accounts must be paid into the service charge account.
- Practitioners must tell tenants that, if a dispute exists, any service charge payment withheld by them should only be the actual sum in dispute.
- Practitioners must tell landlords that, following the resolution of a dispute, any incorrect service charge should be adjusted straight away.
The new rules are expected to have significant practical implications for property owners and managers in ensuring the new standards and requirements are met. For example, where a landlord has used a fixed or capped service charge as an incentive, they must fund any shortfall and are prevented from attempting to recoup any shortfall from other tenants.