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Service Charges and Commercial Leases

The RICS has launched a consultation on the fourth edition of the Service Charge Code for commercial property


Background

Service charges can be a source of contention between landlords and tenants. Where the landlord provides services and charges their cost to the tenants, a properly run service charge can reduce the scope for conflict and make the management of the property easier.

The terms of the Code have influenced the drafting of service charge provisions in new leases, either through the initiative of landlords or by tenants amending draft leases to ensure that the service charge clauses are ‘code compliant’. For example, a modern lease may well include a statement that the landlord must take into consideration the administrative, accounting, procurement, management and operational provisions of the Code.

What is changing?

Quite a lot. Instead of simply setting out best practice, it will become an RICS Practice Statement with mandatory principles that surveyors will be bound to follow.

Eight mandatory principles

1 Owners and managers must seek to recover no more than 100% of the proper and actual costs of the provision or supply of the services unless the lease of the property gives them the explicit right to do so.

2 Owners and managers must ensure that service charge budgets, including appropriate explanatory commentary, are issued annually to all tenants.

3 Owners 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.

4 Owners and managers must ensure that a service charge apportionment schedule for their property is provided annually to all tenants.

5 All expenditure that the owner and manager seeks to recover must be in accordance with the terms of the lease.

6 Service charge monies (including reserve and sinking funds) must be held in one or more discrete (or virtual) bank accounts.

7 All interest earned on service charge accounts must be credited to the service charge account after appropriate deductions have been made.

8 Where acting on behalf of a tenant, RICS members must advise their clients that if a dispute exists any service charge payment withheld by the tenant should reflect only the actual sums in dispute.

The Code recommends that lease renewals are used as an opportunity to update non-compliant service charge clauses, even if this means that, for a time, there may be new and old service charge clauses in different leases of the same property.


Beau Borg – BTMK

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