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Monday, May 20, 2019

New RICS Service Charge Code Spells Change

By Nicky Knight and William Frost (Leeds, U.K.)

A new service charge code of practice (the Code) came into effect in the United Kingdom on April 1, 2019. So what were the changes and what do they mean for landlords and tenants?

There have been a number of changes and amendments to the Code over the years, but this latest update differs from the third edition primarily in that it is a “Professional Statement, which Royal Institution of Chartered Surveyors (RICS) members must act in accordance with”.

As responsible property managers and RICS members, Avison Young look to the appropriate guidance and best practice that RICS publicise and where possible, lease permitting, do not deviate from this. Given the status of the new Code now being a Practice Statement, it is now mandatory requirement for all RICS members to adhere to this and Avison Young have taken steps to ensure our processes and the information provided to tenants adheres to this updated advise.

The new Professional Statement sets out mandatory requirements. RICS members who do not follow these face the threat of legal or disciplinary consequences, along with potential allegations of professional negligence. In addition, the statement sets out obligations for acting on behalf of the landlord and the tenant. However as per previous editions, it cannot override the terms of the lease.

So, what are the major additions to the Professional Statement from previous versions of the Code?

Mandatory requirements
The mandatory service charge requirements as outlined in the new Professional Statement are:

  • Service charge apportionments must not total more or less than 100%;
  • Service charge budgets, including commentary, must be provided;
  • Signed statements must be issued annually;
  • Apportionment matrices must be issued annually;
  • Expenditures must be in accordance with the lease terms;
  • Funds (i.e. reserve, sinking etc.) must be held in discrete bank accounts;
  • Interest must be credited to the service charge account;
  • Withheld amounts must reflect the disputed amount only; and
  • Managing agents must notify clients of any disputes and amend incorrect service charge without delay.
Previously, many of the above requirements were only recommendations in the third edition in accordance with best practice guidelines. Many requirements are welcome additions which, we hope, will help to reduce the number of service charge disputes that emerge between landlords and tenants over what are fundamental elements of managing service charges.

As part of Avison Young’s Service Charge Consultancy team, we have experienced difficulty – and even resistance – in all of these areas when trying to obtain information in the past. So, we see the addition of these mandatory requirements as a positive step and are optimistic that they will improve communication and transparency between landlords and tenants.

Ethics and professionalism
The new Professional Statement also includes a section on ethics and professionalism. Previous versions of the Code have not specifically outlined ethical principles that RICS members must abide by. In particular, the new Professional Statement outlines five ethical mandatory principles, which are as follows:

  • Act with integrity;
  • Always provide a high standard of service;
  • Act in a way that promotes trust in the profession;
  • Treat others with respect; and
  • Take responsibility.
Whilst these are mandatory for RICS members, we believe that non RICS members should also strive to follow the principles at all times.

Duty of care
The Professional Statement highlights the fact that managing agents have a duty of care to occupiers and owners. It reminds us that it is the occupiers’ money that is being utilised and from our experience this fact is often overlooked, be it in error or on purpose.

New leases
A section of the Professional Statement relates to new leases, the focus being on reviewing service charge clauses to bring them into the modern age. Our Avison Young Service Charge Consultancy team already reviews service charge terms in new leases for a number of our clients and we really welcome this addition. From our experience, without such reviews prior to the lease being completed, service charge clauses are often overlooked, leading to increased ambiguity and a greater likelihood of dispute. Such disputes are detrimental to the owner / occupier relationship.

Further clarity
Whilst we believe that the new Professional Statement takes positive steps to reduce service charge disputes, in particular setting out mandatory principles that RICS members must follow, there are some areas where we believe further clarity is required. For example:

Fixed percentage of fixed amount – the Professional Statement outlines within section 3.6 that in some instances, fixed service charges may lead to the total percentage being above or below 100%. Whilst the Professional Statement specifies that service charge apportionments must not total more or less than 100%, our interpretation of the wording is that it does not provide guidance on what to do in such circumstances. We believe that this could lead to potential dispute so would welcome further clarity.

Best Practice for shopping centres, retail and leisure – the Professional Statement provides more detail than previous editions in relation to marketing and promotions. Whilst this is a positive step and we welcome such clarity, it outlines items that would fall within the ‘marketing and promotions’ cost category. Some occupiers (such as a bank or a gym) would be bound by the Professional Statement but at a disadvantage when it comes to marketing and promotions because they do not see the benefit of use that other retail occupiers may. This situation is something that our Service Charge Consultancy team has disputed in the past on behalf of occupier clients.

Non-RICS members – the Code as a professional statement binds RICS members only. There is no obligation for non-RICS members to abide by the mandatory sections. Whilst we are optimistic that some non-RICS members will abide by the mandatory sections, there are many who will not. From our experience it is often individual landlords who are the worst offenders when dealing with service charges.

Conclusion

In conclusion, the new Code is a Professional Statement that all RICS members must act in accordance with. This means that it has progressed on from previous editions which were best practice guidelines. It outlines mandatory requirements that must be fulfilled, and these are all areas in which Avison Young’s Service Charge Consultancy team has previously experienced difficulty obtaining information. In addition, the new Professional Statement outlines that when dealing with new leases, there should be a focus on reviewing service charge clauses to bring them up to the modern age. From our experience, this area is often overlooked and careful consideration can reduce the likelihood of dispute.

The Professional Statement outlines five ethical principles that must be followed. These will apply to all RICS members and it is important that these are observed. We also believe that non RICS members should follow the principles at all times to ensure a high standard of service is provided.

Whilst there are areas where we believe further clarification is required, we are optimistic that the new Professional Statement is a positive progression from the previous edition and will improve communication and transparency between landlords and tenants – and we welcome this new approach.

(Nicky Knight is an Associate based in Avison Young’s Leeds, U.K. office, and William Frost is a Senior Service Charge Consultant, also based in Leeds. Both are part of Avison Young’s U.K. Service Charge Consultancy team. For more information: Contact Nicky Knight at Nicky.knight@avisonyoung.com +44 (0)113 280 8058; or William Frost at William.frost@avisonyoung.com or +44 (0)113 280 8089.)

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