Service Charges in Commercial Property

NEW RICS CODE OF PRACTICE

On 4th May 2011 the RICS issued the second edition of their Code of Practice for service charges in commercial property.

The updated Code is endorsed by leading industry bodies, the RICS having collaborated with a range of trade associations for both occupiers and owners, including the British Property Federation as well as office and shopping centre specialists, including the British Council of Shopping Centres.

The original Code of Practice came into effect on 1st April 2007, but was designed primarily for larger properties and expressed in a flexible language to enable it to work with a wide variety of lease provisions. It was however criticised for failing to provide adequate guidance on accountancy policies and for giving too much freedom to property owners on other issues.

The new Code builds on the previous Code, encouraging improved relations between commercial property owners and their tenants when it comes to service charge. It emphasises better communication, timely action and transparency, which will be of great benefit to both parties. There are however certain new elements including provisions dealing with sustainability and marketing. The Code also places greater emphasis on alternative dispute resolution methods as a sensible way to settle service charge disputes, recommending that all leases permit ADR or that the parties chose to use it even if the lease does not require them to do so.

Where the Code is incorporated within a lease, a landlord will not be able to make a profit from the service charge, should aim to achieve value for money, must contribute for void units and credit to the service charge account any interest earned on advance payments. Generally the costs of improvement or equipping the building will not be able to be included within the service charges and service charge should not be run to make either a profit or a loss (except for a reasonable commercial management fee) with service charges being demonstrably fair and reasonable. Tenants will find it easier to challenge items in the service charge accounts but there are also additional obligations imposed on occupiers by the Code.

However, the Code has no legal weight and landlords are not required to adopt it although they may choose to do so. We believe that due to the fact that leading members of the British Property Federation are planning to adopt the new Code, the majority of new commercial leases within larger properties will probably be Code compliant, but in the case of smaller commercial premises, until the Code has full legal status, it will probably not be adopted. Having said that, the Code represents best practice in view of RICS and could be used by tenants in an argument against unfair service charge provisions in leases.

For more information on the second edition of the Code and how it can be utilised by landlords and tenants, please contact Melissa Page on 01908 689354 or by email at mpage@geoffreyleaver.com.