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Commercial property service charges: new rules explained

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Commercial property service charges: new rules explained

The Royal Institute of Chartered Surveyors (RICS) professional statement relating to service charges in commercial properties (“the Statement”) became effective on 1 April. Compliance by all RICS members and regulated firms is compulsory.

Service charges are notoriously complex and both parties will naturally want to ensure an approach which suits them, however, tenants are often left feeling they have little influence.

The Statement aims to address these issues and has four key aims and objectives:

  • Improve general standards and promote best practice, uniformity, fairness and transparency in the management and administration of service charges in commercial property
  • Ensure timely issue of budgets and year-end certificates
  • Reduce the causes of disputes, and provide guidance on the resolution of disputes if these arise
  • Provide guidance to solicitors, their clients (owners or occupiers) and managers of service charges in the negotiation, drafting, interpretation and operation of leases.

It also has nine key principles, which the RICS says should be incorporated into leases:

  1. All expenditure that the owner and manager seek to recover must be in accordance with the terms of the lease
  2. Owners and managers must seek to recover no more than 100 per cent of the proper and actual costs of the provision of supply of the services (they should not profit from the service charge)
  3. Owners and managers must ensure that the service charge budgets, including appropriate explanatory commentary, are issued annually to all tenants
  4. Owners and managers must ensure that an approved set of service charge accounts showing a true and accurate record of the actual expenditure are provided annually to all tenants
  5. Owners and managers must ensure that a service charge apportionment matrix for their property is provided annually to all tenants
  6. Service charge monies (including reserve and sinking funds) must be held in one or more discrete (or virtual) bank accounts
  7. Where interest is earned on virtual service charge accounts, or where separate accounts per property are not operated, a proper and reasonable amount of interest, calculated on normal commercial rates, must be credited to the service charge account after appropriate deductions have been made
  8. Where acting on behalf of a tenant, practitioners must advise their clients that if a dispute exists, any service charge payment withheld by the tenant should reflect only the actual sums in dispute
  9. When acting on behalf of a landlord, practitioners must advise their clients that following resolution of a dispute, any service charge that has been raised incorrectly should be adjusted to reflect the error without undue delay.

Impact on pharmacy leases 

If you are taking a new lease, then ideally when negotiating heads of terms you should agree that the service charge will comply with the Statement. If you have a surveyor involved, they will be able to negotiate the details of this for you. If not, your solicitor, when drafting the lease, should check that the service charge provisions in legal or disciplinary consequences for members” broadly comply with the Statement.

If you have an existing lease, then the Statement cannot override the lease, but its principles should be applied when interpreting the service charge provisions. If you are renewing an existing lease, the service charge provisions should be updated to reflect the Statement.

Who must comply and why is this important? 

The Statement must be complied with by all RICS members and regulated firms.The extent to which the recommended best practices are complied with will depend on a variety of issues such as size and nature of the property, total service charge costs and the amounts payable by each of the tenants. Any deviation from the Statement could result in legal or disciplinary consequences for members and importantly the service charge itself could be open to challenge.

Given that the Statement should make negotiating the service charge easier for commercial tenants who want to ensure what they are signing up to is fair, and without unusual or onerous provisions, it’s good news for commercial tenants. For landlords and property managers, the need to adapt practices to ensure compliance with the Statement could mean an extra burden.

The above is a general overview and we recommend that independent legal advice is sought for any specific concerns.

Michelle Noble is a solicitor and member of the Pharmacy Transactions Real Estate Team at Charles Russell Speechlys LLP
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