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Service Charge – RICS code gets new teeth

As 2019 begins, the property sector is gearing up for the introduction of the new RICS professional statement, which will supersede the current code of practice from 1 April 2019. The statement cannot override the terms of a lease but, as long as it is read in conjunction with the lease, the statement will guide the practical implementation of service charge provisions in the lease to ensure services are managed properly.

The key change from the current regime is the inclusion of nine mandatory obligations for RICS members and regulated firms (i.e. firms that have chosen to be regulated by the RICS and agree to work to its standards). The professional statement also identifies best practices. Whilst not mandatory, the RICS warns that it may seek justification from members who depart from best practice.

The professional statement calls out both managers and owners who display a lack of transparency in their service charge procedures and consultants engaged by occupiers to pick over the detail of service charges, a practice which can encourage tenants to withhold disproportionate amounts of payments for disputes. Instead managers, owners and occupiers alike should, the statement says, look to behave in a way that reduces the likelihood of a dispute arising.

The professional statement also recognises the confusion surrounding terms such as sinking funds, reserve funds and depreciation charges and sets out definitions for them.

And it suggests a new set of exclusions for service charge costs, including:

  • capital costs for the building;
  • improvement costs beyond normal maintenance, repair or replacement, though “enhancement of fabric, plant or equipment” can be justified following a review of options and a cost benefit analysis;
  • future redevelopment costs; and
  • costs relating to the owner’s own investment interest or void premises.

Another new section discusses the Minimum Energy Efficiency Standards. Environmentally conscious Landlords will be encouraged to see the RICS note that, subject to the terms of the lease and the rest of the professional statement, “any subsequent costs of improving energy efficiency might comprise a legitimate service charge item as long as there is a proportionate cost benefit to tenants”.

The changes to the current regime made in the professional statement add more clarification, consistency and accountability to the service charge procedure. The professional statement comments that it is likely a judge or equivalent would take into account the requirements under the professional statement during any legal proceedings. Landlords, occupiers and professionals alike should consider how the changes to the current scheme should influence their current practices.

You can read the professional statement in full by clicking here.