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Industry issue:

New service charge accounting code to become mandatory

13 April 2018

By Peter Forrester

Industry collaborative guidance for the management and administration of service charge in commercial property was first published in 1996.  The 4th edition of the RICS Code of Practice is to be issued as a professional statement and will come into force from autumn 2018.

In the 22 years since its inception the Code has had a very profound and positive impact upon the commercial property sector and has facilitated major improvements in standards of delivery and accountability for spending what is, in effect, tenants’ money.

However, while there are a wealth of examples of managing agents and landlords seeking to employ the principles set down in the code, there are many instances where best practice has, at best, simply been ignored and at worse, positively flouted.

The RICS continues to be concerned by the behaviour of certain landlords and managing agents and has long called for a fairer and more professional approach to property management to help outlaw these “rogue” elements. 

The move to formalising the Code as a professional statement with mandatory obligations for RICS members and regulated firms is a significant step in helping to regulate the activities of landlords and managing agents. 

The new professional statement will set the highest level of professional standards and represents a continued evolution of best practice processes and procedures, recognising the demand in the market for such standards in an ever increasingly complex and challenging area of commercial property management.

With the change to an RICS professional statement, the mandatory requirements that an RICS professional or regulated firm is expected to adhere to now, importantly, will have more serious regulatory implications and departure from the requirements may now have legal and/or disciplinary consequence. 

The new mandatory requirements include such matters as:

  • The costs that landlords seeks to recover must be in accordance with the terms of the lease and be no more than 100% of the actual costs incurred.
  • Budgets and year end accounts must be provided annually.
  • Service charge monies are to be held in one or more discrete bank accounts with any interest earned credited to the service charge account.
  • Owners must provide a detailed explanation as to how the tenant contributions are calculated.

In addition to the mandatory requirements, which will represent what is considered as minimum acceptable standards of performance, practitioners must also have regard to the best practice principles set out in the professional statement as well. These principles, which have also been reviewed and updated, underpin and support the mandatory requirements.

While the RICS acknowledges that, in rare circumstances, strict compliance may not always be possible, RICS professionals should only depart from best practice for justifiable good reason and, where this might have a material impact on the surveyor’s advice, clients must be informed in writing of the departure and the reason for the departure.

As with the existing code, the new professional statement cannot override the terms of existing leases and a failure to meet the standards set out in the statement will not of itself negate or limit a tenant’s liability to pay service charge under the lease.

Produced by the RICS in collaboration with various industry bodies representing owners, occupiers, investors and managing agents together with support of the Institute of Chartered Accountants in England and Wales, one further positive change is the endorsement of the professional statement by the Law Society.

The increased regulatory importance of the proposed new statement should lead all parties to consider carefully its principles and, in particular, requirements before entering into new leases.

Peter Forrester is an independent service charge consultant and chairman of the RICS professional group and lead author responsible for the code