The RICS’ new professional statement, Service charges in commercial property (1st edition), was published on 17 September 2018 after many months’ discussion and consultation. Crucially, for the first time, it sets down mandatory requirements on service charge administration for RICS professionals working in commercial property management.
This brings the commercial sector more in line with residential management, puts extra onus on managing agents in the management and administration of service charges and significantly tightens best practice guidelines.
It also gives occupiers greater clarity and certainty of the service charges they need to pay and provides guidance to solicitors, their clients and managers of service charges in the negotiation, drafting, interpretation and operation of leases, in accordance with best practice.
The code now bites
There are two key points to note at the outset: first, if searching for a copy, this is a professional statement and a first edition, superseding earlier service charge codes of practice. Previously, the code was covered by a guidance note in its third iteration – so do not start looking for a fourth edition.
Second, the statement comes into effect on 1 April 2019, giving those in this field time to work out how to implement the changes while avoiding the December year-ends that appear to exist for most service charges.
The mandatory element of the new code is by far the biggest overarching change. Although the RICS has provided guidance on the management and administration of service charges for commercial property since 1996, only now is its guidance being given teeth.
Within the 67-page statement, nine mandatory requirements are set out, covering professional, behavioural, competence and technical obligations from which RICS members must not depart (see page 74).
It is important to note that the mandatory requirements set out what the RICS views as the minimum standards required by members. The code needs to be adopted in full to achieve best practice. If members depart from the best practice requirements, they should only do so for justifiable reasons.
Practitioners must also follow the best practice principles enshrined in the professional statement. These underpin and support the mandatory requirements, focusing on such matters as:
■ transparency of service costs;
■ not profiting from provision of services;
■ demonstrably fair and reasonable apportionment of costs between occupiers;
■ using alternative dispute resolution to settle disputes;
■ ensuring value for money (as opposed to lowest price); and
■ excluding items such as initial costs relating to the original design and construction.
So what does this mean and tell us about our industry? On reflection, we may be thankful that the RICS is bringing in these standards rather than have them introduced by statute. In a parallel move, the Association of Residential Managing Agents (ARMA) has supported greater self-regulation through its ARMA-Q regime, which places the customer at its heart.
Fixed fees
The service charge code has developed over the years, a significant change being the recommendation and implementation of fixed-fee service charges across the industry, moving away from the historic percentage basis. Although this has encouraged best value rather than lowest price, its role in improving service levels is questionable, hence the new mandatory requirements.
These include the need for service charge accounts to be closed yearly – with best practice being to aim for four months after the year-end. Good property managers shouldn’t fear this stipulation. They have always had to ensure a safe working environment at the buildings they manage. Greater compliance in the management of service charges is a natural extension of their role and should give property managers “skin in the game” and a genuine stake in the process.
Clients too will be relieved that failure by their managing agent or in-house management team to achieve closure within the timeframe will not affect their ability to recover the service charge from the tenant unless there are specific lease restrictions.
For the managing agent, failure to comply could lead to disciplinary action by the RICS or even a negligence claim. This is a major departure from the previous iteration under which property managers could choose which elements of the code to adopt and there were no significant repercussions if it was ignored, a factor that precipitated poor practices in some quarters.
With much talk about the need for better communication and customer service, occupiers will now have some comfort that they have a baseline of standards. A large part of the relationship between managing agents and occupiers is based on trust; the professional statement supports a greater drive towards documenting and formalising service charge procedures, moving away from implicit to explicit communication.
Clarification
This shift towards greater transparency and efficiency is highlighted in the requirement for managers to issue budgets and explanatory commentary at least one month before the start of the service charge year.
A further key clarification under the new rules is that year-end accounts should detail actual expenditure. Again, this clear stipulation brings commercial managers closer in line with residential block managers.
It means that, if building works are not being delivered at the date of the year-end, the cost should be excluded in that year and accounted for in the next year. Although this is what should be happening, anybody who has attended a talk by service charge expert Peter Forrester will realise this is not always the case.
Across service charges, there has been less use of reserve funds, but we may now see a resurgence in order to overcome issues such as: works being budgeted but delayed due to contractor capacity; tenant requirements; or tenants not paying on time so there are insufficient funds.
The statement also requires expenditure to be recoverable under the lease. Most leases do not allow for the landlord’s cost of rent collection to be recovered so, if a separate collection fee is not being charged, a conversation will be needed with the landlord.
In addition, best practice requires all income earned by the property manager from the service charge to be clearly stated – something our residential block management colleagues enforce and residential customers demand as standard. As the commercial property sector increasingly embraces flexibility and is populated by start-ups that expect good customer service, this evolution is a natural step.
So where next for the property management industry? We await the impact of the Hackitt Review’s findings – especially in relation to new fire regulations – and anticipate further guidance from the professional bodies, alongside possible government legislation.
But there is little doubt that future initiatives will continue to lift standards in what the new professional statement describes as “an increasingly complex and challenging area of commercial property management, which requires practitioners to have a particular and demanding skill set”.
The nine mandatory requirements
Professionals involved in the management of service charge accounts must act in accordance with these principles:
1 All expenditure that the owner and manager seek to recover must be in accordance with the terms of the lease.
2 Subject to section 4.2.7, owners and managers must seek to recover no more than 100% of the proper and actual costs of the provision or supply of services.
3 Owners and managers must ensure that 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 constituting the service charge 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 Interest earned on 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.
