rics service charge code professional statement … · 2018-11-13 · rics tackles ‘unfair’...

RICS SERVICE CHARGE CODE

PROFESSIONAL STATEMENT UPDATE

Richard Cressall

Kara Davies

Gordons LLP 13 November 2018

Overview

RICS SERVICE CHARGE CODE PROFESSIONAL

STATEMENT UPDATE

This session provides a crucial update on the new Professional Statement, outlining the mandatory

elements and how they will impact your professional practice and that of your clients.

► Aims and objectives of the professional statement

► Code of practice – the core principals

► The mandatory requirements


STATEMENT UPDATE

Where can I find a copy of the Service charges in commercial property 1st edition ?

https://www.rics.org/uk/upholding-professional-standards/sector-standards/real-estate/service-charges-

in-commercial-property-1st-edition/

https://www.rics.org/uk/upholding-professional-standards/sector-standards/real-estate/service-charges-in-commercial-property-1st-edition/

What is the Professional Statement?


STATEMENT UPDATE

► The Service Charges in Commercial Property 1st edition (September 2018)

► The Professional Statement sets out markers for the standards required in commercial property and

provides mandatory obligations that RICS members and regulated firms engaged in this area

must comply with.

► The professional statement will be effective from 1 April 2019 and will supersede the previous

three edition of the Service Charges in Commercial Property which were published as codes of

practice.


RICS tackles ‘unfair’ commercial property service charges


STATEMENT UPDATE

The new mandatory requirements are to ensure that service charges to commercial tenants are

transparent, upfront and fair, and that any costs incurred are in accordance with the terms of the

occupational leases.

“We have long called for a fairer and more professional approach to property management to

help outlaw “rogue” landlords and managing agents. The launch of the RICS professional

Statement ‘Service charges in commercial property’ … is a momentous step in helping to

better regulate the activities of landlords and their agents, whilst protecting tenants from

having to pay for unscrupulous repair or maintenance costs”

RICS Press Release – 17.09.2018


Language differences between the Statement and the Code (3rd edition)


STATEMENT UPDATE

The Code (3rd Edition)

► Less robustly worded due to status - contains best practice and recommendations only (i.e. words

such as ‘are expected’ and ‘are advised’ are used).

Statement

► Definitively worded due to mandatory status (i.e. words such as ‘should’ and ‘must’ are used).

Do I need to take notice of the professional statement?


STATEMENT UPDATE

Yes– and this applies to:

► RICS Members

► Part II Personal and Professional Standards

► Rules of Conduct for Members 04 June 2007 version 6 With effect from 01 January 2013

► RICS Regulated Firms

► Part II Conduct of Business

► Rules of Conduct for Firms 04 June 2007 version 6 With effect from 25 April 2017

Application of the RICS professional statements


STATEMENT UPDATE

RICS will take into account relevant professional statements in deciding whether a member acted

professionally, appropriately and with reasonable competence.

RICS further adds:

► members should only depart from the best practice requirements for justifiable reasons

► that there may be legislative requirements or regional, national or international standards that have

precedence over an RICS professional statement

► In legal proceedings a judge, adjudicator or equivalent may take RICS professional requirements

into account

What are the 9 mandatory requirements?


STATEMENT UPDATE

1. all expenditure that the owner and manager seek to recover must be in accordance with the terms of the lease

2. subject to instances where the amount of the overall service charge costs the occupier pays are fixed at the time

the lease is granted, owners and managers must not seek to recover more than 100% of the proper and actual

costs of the provision or supply of the 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

What are the 9 mandatory requirements?


STATEMENT UPDATE

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, and

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

What are the core principles?


STATEMENT UPDATE

24 core principles which reinforce and add a little more practical detail to the mandatory requirements:

► service costs

► allocation and apportionments

► duty of care

► financial competence

► occupiers responsibility

► right to challenge/alternative dispute resolution

► timeliness

► transparency

► value for money, and

► exclusions

Summary of the main differences between the Statement and the Code (3rd edition)


STATEMENT UPDATE

The Mandatory Requirements

Recoverable percentage


► Silent on the specific percentage that may be recovered

Statement

► owners and managers must seek to recover no more than 100% of the proper and actual costs of

the provision or supply of the services, save in instances where the amount of the overall service

charge costs the occupier pays is fixed at the time the lease is granted.

► aims to cover instances where the amount or percentage of the overall service charge costs the

occupier pays is fixed at the time the lease is granted. While a fixed percentage or amount can make

dealing with the service charge more straightforward and simple, this method is inflexible.



STATEMENT UPDATE


Annual budgets


► recommends that managers should issue budgets to occupiers, including an explanatory

commentary, at least one month prior to the start of the service charge year.

Statement

► owners and managers must issue service charge budgets to tenants annually, including appropriate

explanatory commentary.



STATEMENT UPDATE


Apportionment matrix


► recommends that managers are expected to make available to all occupiers a full apportionment

matrix that clearly shows the basis of calculation and the total apportionment per schedule for each

unit within the property/complex. There is no set time scale within which this must be done.

Statement

► an apportionment matrix must be issued annually to all tenants. CP21 stipulates that managers must

now issue to occupiers, an apportionment matrix at least one month prior to the start of the service

charge year.



STATEMENT UPDATE


Bank accounts


► CP15 recommends that service charge monies are held in one or more discrete bank accounts in

recognition of the fact the monies are being held to provide for the procurement and delivery of the

services. BPP7 recommends that monies accumulated in a sinking or reserve fund are held in one

or more separate discrete bank accounts to be maintained in trust for the occupiers.

Statement

► mandatory requirement for service charge monies (including reserve and sinking funds) to be held in

one or more discrete (or virtual) bank accounts.

► The Statement has introduced the concept of ‘virtual bank accounts’, being a subsidiary or sub-

account of a physical bank account that allows segregation of funds, eg in respect of individual

properties, from other funds in the same account or alternatively where funds can be clearly

identified through the use of separate ledgers.



STATEMENT UPDATE


Sums in dispute


► CP18 recommends that where a legitimate dispute exists, any payment properly withheld should

reflect only the actual sums in dispute.

Statement

► when acting for the tenant, practitioners must advise that if a dispute exists any service charge

payment withheld by the tenant should reflect only the actual sums in dispute.

► The wording of this requirement has been simplified and the terminology ‘legitimate’ and ‘properly’

have not been used—presumably to avoid the prospect of disputes in interpreting their meaning.



STATEMENT UPDATE

Core principles and best practice recommendations

Occupiers responsibilities


► CP18 recommends that occupiers are obliged to ensure prompt payment of all service charge on-

account and balancing charges.

Statement

► CP15 dictates that occupiers should ensure prompt payment of all legitimate service charge on-

account and balancing charges. In contrast to the simplification of MR8 above, this introduces the

prospect of a dispute over what is a legitimate charge.



STATEMENT UPDATE


Adjustment after resolution


► Silent

Statement

► when acting on behalf of a landlord, practitioners must advise that following resolution of a dispute,

any service charge raised incorrectly should be adjusted to reflect the error without undue delay.



STATEMENT UPDATE


Handover procedure


► Referred to, and previously available as, a RICS information paper Commercial property service

charge handover procedures (2011).

Statement

► New appendix to the Statement: Commercial Property service charge handover procedure.



STATEMENT UPDATE


Exclusions

► CP24 dictates that service charge costs should not include any of the following:

► Any initial costs (including the cost of leasing of equipment) incurred in relation to the original design and

construction of the fabric, plant or equipment

► any setting up costs, including costs of fitting out and equipping the on-site management offices that are

reasonably considered part of the original development cost of the property

► any improvement costs above the costs of normal maintenance, repair or replacement. Service charge costs

may include enhancement of the fabric, plant or equipment, where such expenditure can be justified

following an analysis of reasonable options and alternatives, and with regard to a cost-benefit analysis over

the term of the occupiers’ leases. Managers should provide the facts and figures supporting such a decision

► future redevelopment cost

► costs and fees relating to the owner’s investment interest, for instance, asset management and rent

collection, cost of letting units and matters between the owner and an individual occupier. This last category

may include activities such as enforcement of lease covenants, dealing with landlord consents for

assignments, sub-letting, alterations, rent reviews, additional opening hours, etc

► costs attributable to void premises and the owner’s own use of the property, and

► any costs arising out of the negligence of the manager or owner

10 things to remember about the new commercial property code…


STATEMENT UPDATE

1. The new regime comes into force on 1 April 2019

2. The new code affects commercial property only

3. The new code is a professional statement

4. Existing leases are unaffected by the professional statement

5. Tenants must now receive annual updates

6. Any costs recovered must be in line with the terms of the lease

7. Service charge payments must be held in a bank account

8. There is a greater emphasis on the resolution of disputes

9. Disputes should be resolved quickly and efficiently

10. The new code introduces a service charge handover procedure

Does it make any difference?

RICS SERVICE CHARGE CODE

PROFESSIONAL STATEMENT UPDATE

A little bit of law to round off your evening…

Any questions?

rics service charge code professional statement … · 2018-11-13 · rics tackles ‘unfair’...

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