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Service charges in commercial property

publication date: Nov 17, 2006
 | 
author/source: Michael Hare
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In multi - tenanted buildings service charges are probably one of the most important elements of the relationship between landlord and tenant and one that can lead to the most disputes, be they informal or formal. April 2007 sees the long awaited introduction of the Code of Practice for Service Charges in commercial property which is to be launched by the RICS with endorsement from British Property Federation (BPF), British Council for Offices (BCO), British Council for Shopping Centres (BCSC), British Retail Consortium (BRC) and Property Managers Association (PMA).

Michael Hare BSc FRICS FNAEA FICBA, partner in charge of the commercial division at Harrogate based Chartered Surveyors and property consultants Feather Smailes & Scales LLP, says the whole point of the new Code is to encourage transparency and communication for all parties involved and will set out changes in relationships between owners, occupiers and agents in the hope of modernising the typical commercial lease.

RICS and the “big players” in the commercial property market (BPF, BCO, BRC, PMA etc) felt that historically the relationship between landlords and occupiers was perceived to be difficult, and the new code envisages that both sides will be able to communicate more effectively and further build an element of trust. The Code should, it is hoped, further enhance communications between the groups because both sides desire this.

The old Code had little authority and landlords particularly felt there was a need to move forward in various areas with positive initiatives on best practice, and so the new Code will actually have “Guidance Note” status, which for RICS members means it represents “best practice” and whilst it does not have to followed, it is likely that when an allegation of negligence is made against a Chartered Surveyor, the court is likely to take account of the content of this new Code in deciding whether or not the practitioner acted with reasonable competence.

The RICS recommends that the opportunity is taken after April 2007, on either lease renewal or the grant of a new lease, that all such new leases follow the best practice as set out in the revised Code. From a practical point of view modernising service charge provisions on an “as and when basis” may lead to a dual service charge, and interim measures are therefore likely to be necessary during the transitional period.

The general principal adopted by the new Code is that a service charge is the means by which the costs of providing services to a property are recovered from the users of those services. The total costs should not inflated for profit, and similarly there should be no residual loss left for the owner to pay. Salient points of the new Code include:

  • Best practice requires both the owner and manager to recognise a duty of care to occupiers
  • Best practice requires occupiers to have the right to reasonably challenge the expenditure
  • Emphasis is put on open and frequent communication
  • Regular meetings are to be held with occupiers, where appropriate, who will do their best to participate
  • All services should be provided both professionally and commercially
  • Contractors and suppliers of services will be required to perform to written performance standards which will be regularly monitored and reviewed
  • The aim is to achieve value for money rather than lowest price
  • Best practice requires that management fees will no longer be linked to percentage of expenditure but will be a reasonable price for the total cost of managing the provision of services at that specific location
  • Best practice requires there will be transparency in the management fee charged
  • Whatever method is used for apportionment of costs (“the service charge”) it needs to be demonstrably fair and reasonable and there also needs to be a rational commentary as to how this apportionment has been calculated
  • Best practice requires regular reviews to be undertaken to ensure the apportionment methodology remains fair and reasonable, especially after any changes in the occupational use of the property
  • Best practice provides service charge budgets, including the appropriate explanatory commentary, should be produced to occupiers at least one month prior to the start of the service charge year
  • Owners should submit certified service charge accounts to occupiers within four months of the end of the service charge year, and should give a comprehensive summary of items of expenditure with full explanations of material variations against the budget

In essence therefore the main strands of the new Code are that service charges are run on a “not for profit, not for loss basis” and that there should be regular and open communication between the parties. The intention is that if these principles can be followed along with the detailed best practice set out in the Code, the number of service charge disputes can be significantly reduced.

Michael Hare is one of the ICBA course presenters. If you would like any further info on ICBA courses, qualifications or membership, please email info@icba.uk.com



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