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The New RICS Statement Came Into Force On 1st Of April 2019 But What Does This Mean In Reality?

Reasons to choose Wilson Browne

The new RICS Professional Statement Service charges in Commercial property 1st edition September 2018 (Statement) came into force on the 1st of April 2019.

What continues to drive this Statement and its previous iterations is the RICS’s desire to stamp out bad landlord’s practices of exploiting tenants through unfair and opaque service charge regimes.

Aims of Statement

The aims and objectives of the Statement are to:

  • improve general standards and promote best practice, uniformity, fairness and transparency in the management and administration of services charges in commercial property.
  • ensure timely issue of budgets and year-end certificates.
  • reduce the causes of disputes, and to provide guidance on the resolution of disputes if they arise.
  • provide guidance to solicitors, their clients (whether owners or occupiers) and managers of service charges in the negotiation, drafting, interpretation and operation of leases, in accordance with best practice.

It is important to consider whether the Statement overrides the service charge provisions of a lease?

The Statement will not automatically override the position stated in the lease, it is to be read in conjunction with the terms. The purpose of the Statement is to help to identify the best approach in interpreting a lease (particularly on areas where the lease is silent) to enable the effective management of services. its impact will be limited where a lease contains poorly drafted or problematic service charge provisions.

What are the consequences of non-compliance?

A deliberate breach:

For the surveyor – A professional reprimand

For the Landlord – A fine for the Landlord and a damaged reputation

Tenants may examine their leases closely to look for holes in lease compliance and use them for gain – even if not suffering any losses.

What happens if my current lease does not comply?

You could seek a mid-term variation or look to comply upon renewal. The Statement’s aim is to promote visibility and accountability, usually, as long as there is no cost, the tenant will not complain if these improve. A surveyor would have a defence to a claim that they were acting in conflict providing they had sought to remedy that conflict (whether or not they were successful.)

So, what are the Mandatory requirements?

  • all expenditure that is to be recovered must be in accordance with the terms of the lease and they must seek to recover no more than 100% of the proper and actual costs of the services;
  • each year all tenants should be provided with service charge budgets, including appropriate explanatory commentary. At the end of the service charge year they should also get an approved set of service charge accounts showing a true and accurate record of the actual expenditure constituting the service charge;
  • service charge monies (including reserve and sinking funds) must be held in one or more discrete (or virtual) bank accounts;
  • where acting on behalf of a tenant, they 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; and
  • when acting on behalf of a landlord, they must advise their clients that following resolution of a dispute, any service charge that has been raised incorrectly should be adjusted to reflect the error without undue delay.

RICS members and regulated firms must comply with the mandatory obligations.

The 9 Mandatory requirements are underpinned by 24 core principles

Core principles and Best practice

The core principles; which are underpinned by a series of best practices are intended to help a party achieve the mandatory purposes obligations. The core principles include:

  • Managers should issue budgets to tenants, including explanatory commentary and apportionment matrix, at least one month prior to the start of the service charge year. Detailed statements of actual expenditure, together with accounting policies and explanation, should be issued within four months of the service charge year-end.services are procured on an appropriate value for money basis, and that competitive quotations are obtained or the costs benchmarked
  • owners should not profit from the provision or supply of services save for charging a reasonable commercial management fee that reflects the actual costs of managing the services.
  • All new leases should make provision for either party to require the resolution of disagreements through alternative dispute resolution.

The Statement acknowledges that strict compliance with some of the core principles may not always be possible. The appropriate level of compliance may be based on the professional judgment of all parties as to what is appropriate and reasonable considering all the circumstances.

The tenants should not be charged for:

  • Initial costs incurred in relation to the original design and construction.
  • Any improvement costs above the costs of normal maintenance, repair or replacement. It is worth noting though, service charge costs may include enhancement of the fabric or plant, where such expenditure can be justified on a cost-benefit analysis.
  • Future redevelopment costs.
  • Costs and fees relating to the owner’s investment interest, such as asset management and rent collection and matters between the owner and an individual tenant.
  • Costs attributable to void premises and the owner’s own use of the property.

Impact on lease drafting

Core Principles will impact on lease drafting, particularly exclusions from what should be charged to tenants through the service charge.

New commercial leases entered into after 1 April 2019 should be drafted to ensure compliance with the Statement due to the mandatory obligations, the Statement will have a significant impact in resolving disputes that arise in relation to service charge management.

Comment

Along with these Principles they are a lot of best practice recommendations. How much weight you should give to compliance depends on elements such as size, nature and type of property, the aggregate of the total service charge costs and the amounts payable by individual occupiers.

However, it is the Mandatory requirements and Core principles that are the key regulatory element for surveyors acting for landlords or tenants.

As there are mandatory obligations, it will have an impact on the practical management of service charge regimes than the previous service charge codes, which only provided guidelines for the management of service charge.

If you need any Commercial Property advice, contact our Specialist Team

Jessica Rayns

Posted:

Jessica Rayns

Trainee Solicitor

Jessica is a Trainee Solicitor within the Family team at our Northampton office.