Service Charges in Commercial Property: new Service Charge Code
A new edition of the Royal Institute of Chartered Surveyors (RICS) Service Charge Code for Commercial Property came into force on 1 October 2011. Managing agents, surveyors, landlords, tenants, lawyers and accountants are all likely to be affected by it at some point, but how?
Who needs to read the Code and why?
While the new edition of the Code is not mandatory, it builds on certain key principles in order to promote "best practice" in core service charge areas such as transparency, communication and financial competence. The aim is to ensure that, as leases come up for renewal, or new leases are granted, these documents will increasingly be drafted in accordance with the principles of the Code. Of course, where leases directly repeat the provisions of the Code, the provisions will become binding on the parties. Alternatively, some leases may include more general wording, such as "the landlord shall, when providing the services, have regard to the requirements and core principles of the Code".
It is anticipated that clients and agents will, increasingly, ask for leases to be Code compliant and this requirement may even be reflected in the agreed Heads of Terms. In addition, adherence to the Code is likely to be a factor that is taken in to account by a Court if there is an eventual dispute over service charges. Observance of the Code will also be a relevant consideration if a managing agent/owner is alleged to have been negligent in performing its management duties.
If a lease does not follow Code principles, parties may be asked to justify why this is the case. Therefore it is important that all those involved in the process of granting a lease (and implementing its provisions) are aware of the Code’s requirements and whether those requirements are suitable for the particular property in question – this includes managing agents, surveyors, lawyers, landlords, tenants and accountants.
The Code does give examples of when some (or all) of its principles may not be appropriate for a particular lease, or may require adaptation, such as:
However, parties should "at all times seek to comply with the core principles" set out in the Code.
What are the core principles?
The core principles set out general statements, which can be summarised as follows:
1. Service costs
2. Allocation and apportionments
4. Communication and consultation
5. Duty of care
6. Financial competence
7. Occupiers’ responsibilities
8. Right to challenge/dispute resolutions
11. Value for money
How are the parties advised to implement the core principles?
The Code then sets out the "recommended best practice" in order to implement the core principles. These are detailed provisions which it is not possible to summarise in this article; furthermore, the method of implementation is likely to vary considerably depending on the type and location of property in question.
The Code includes a word of warning about "sweeper clauses" in leases (ie. clauses which entitle a landlord to recover money for any other service it provides). It says that such clauses cannot be used to cover the cost of something that was left out of the lease in error. This highlights the needs for careful drafting at the outset, and trying to address (as far as possible) all situations that are likely to arise.
Although it is unclear whether the Code will become the industry standard in commercial leases, it looks set to gain increased importance. Therefore all of those involved in commercial lettings would be well advised to familiarise themselves with the Code and implement its recommendations where appropriate. Those who choose to ignore the provisions of the Code will no doubt face an uphill struggle in seeking to justify their standpoint.
The Code can be found on the RICS website: www.rics.org/servicechargecode
If you require any further information about the issues raised in this article please contact Rosie Davies (email@example.com), or any other member of Goodman Derrick LLP's Real Estate team on 0207 404 0606.
This guide is for general information and interest only and should not be relied upon as providing specific legal information.
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