With a new service charge Code of Practice (the Code) coming into effect on the 1 April 2019, Nicky Knight and Will Frost from the Service Charge Consultancy team at Avison Young discuss the changes and what it means for landlords and tenants.
There have been a number of changes and amendments to the Code of Practice over the years, but this latest update will differ from the third edition primarily in that it will be a “Professional Statement, which RICS members must act in accordance with”.
The new Professional Statement will set 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, it 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?
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 must be provided, including commentary
- Signed statements must be issued annually
- Apportionment matrices must be issued annually
- Expenditure 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
- Managing agents must notify clients of any disputes and amend incorrect service charge without delay
Many of the above were previously only recommendations in the third edition in accordance with best practice guidelines. Making these mandatory is a welcome addition which we hope will help to reduce the number of service charge disputes that emerge between Landlords and Tenants over what are fundamental element of managing a service charge.
As part of Avison Young’s Service Charge Consultancy team, these are all areas in which we have experienced difficulty, and even resistance, 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
- 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 that managing agents have a duty of care to occupiers and owners. It reminds us that it is the occupiers’ money that is being utilitised and from our experience this fact is often overlooked, be it in error or on purpose.
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.
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 positive 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 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.
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 the 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 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 which will improve communication and transparency between landlord and tenant and we welcome this new approach.