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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:

• type, size and nature of the property
• aggregate of total service charge costs
• best value principles

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

• services to be procured on an appropriate value for money basis
• competitive quotations to be obtained/costs benchmarked
• only the proper, actual costs of providing the services should be billed (ie no profit element)
• any management fee should be reasonable and on a fixed fee basis (not a percentage of service charge)
• costs to be transparent

2. Allocation and apportionments

• service costs to be allocated to the relevant industry standard cost category, and where reasonable to do so, apportioned to those who actually benefit from the particular services
• basis and method of apportionment should be fair and reasonable (reflecting the availability, benefit and use of services)
• managers should publish a full apportionment matrix, showing the basis of calculation and apportionment per schedule for each property

3. Certification

• service charge accounts should be certified as a true and accurate record of expenditure. Those certifying the accounts should act with professional care, diligence, integrity and objectivity

4. Communication and consultation

• manager to consult occupiers over the standard and quality of service charge provision
• manager to communicate with occupiers so they know what to expect
• managers who claim to comply with the Code must be able to show how they do so

5. Duty of care

• owner and/or manager owes duties to occupiers and/or the owner (as applicable)
• there should be clear policies on how the service charge will be managed

6. Financial competence

• managers should demonstrate competence, professionalism, integrity, diligence, objectivity and transparency when preparing accounts
• managers should act in a non-partisan spirit, as experts, ensuring that all costs that are being charged have actually been incurred, and can be recovered under the terms of the lease
• service charge monies should be held in a discrete bank account, with interest being credited to that account
• managers should use industry standard cost codes for reporting service charge expenditure

7. Occupiers’ responsibilities

• occupiers should pay service charges promptly and, where a legitimate dispute exists, any payment withheld should reflect only the actual sum in dispute
• occupiers should appoint somebody to attend service charge meetings who has appropriate authority and responsibility to make decisions
• occupiers should be proactive in assisting with the operation of service systems, eg. cost effective recycling etc

8. Right to challenge/dispute resolutions

• new leases should permit either party to refer disputes to alternative dispute resolution
• if parties cannot agree on a person to settle the dispute, the President of RICS should be able to nominate a suitable person

9. Timeliness

• there should be timely and regular communication and consultation between the parties
• managers must issue service budgets at least one month before the beginning of the service charge year
• managers must issue detailed statements of actual expenditure and accounting policies within four months of the end of the service charge year

10. Transparency

• managers should be transparent in the accounts, explanatory notes, policies and day to day management
• occupiers should be notified of material variances from the service charge budget promptly

11. Value for money

• service quality should be appropriate to the location, use and character of the property
• service standard should achieve value for money and effective service – not necessarily the lowest price

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.

Conclusion

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

Rosie Davies
Senior Solicitor

This guide is for general information and interest only and should not be relied upon as providing specific legal information.