A service charge is “a means by which a landlord can recover from tenants the cost of maintaining and repairing a building and providing certain services”. However, this frequently leads to disputes, as a landlord will want to maintain investment value while a tenant will want to ensure they receive appropriate value-for- money services.
Interpreting the relevant context is not simple though, with contractual lease obligations generally overriding RICS guidance. Case law provides additional guidance, although interpretation and application can be challenging and subject to differences in legal opinion.
The latter was updated on 1 April 2019, in the form of the RICS’ latest professional statement on service charges. It replaces the former RICS service charges code of practice.
The key change is that the new professional statement is mandatory, with accompanying best practice guidance. Some of the main principles include ensuring that all expenditure is recovered in line with the terms of the lease, i.e. no more than 100% of the proper and actual costs, and issuing annual budgets, explanatory commentary, apportionment matrices and year-end accounts to occupiers.
Furthermore, in the event of a dispute, any payments withheld by a tenant should reflect only the actual sums in dispute. When resolved, any incorrectly raised sums should be adjusted without undue delay by the landlord.
It makes increasing business sense in a challenging market to follow the new guidance. We believe that the new guidance should encourage landlords to adopt a more customer-focused approach to property management, treating tenants as valued customers
In particular, the lack of transparency and the timing issue of budget and year-end reconciliations should improve, although interpretation and understanding of the guidance by clients, managing agents and legal advisers is likely to be varied across the market.
On lease renewals, we recommend including a standard clause to ensure that compliance with the new guidance is specifically required. This should also be included at the heads of term stage to reinforce the importance of mandatory compliance with the new guidance.
Finally, tenants should consider negotiating a service charge cap or fixed/index-linked uplift, particularly in short leases, which are likely to become more popular with the IFRS 16 changes to lease accounting in early 2019.
Jen Lemen BSc is partner at Property Elite and Don Lemen is a consultant at Property Elite