Service Charge Best Practice

Last month, the Royal Institute of Chartered Surveyors (RICS) launched their professional statement: Service charges in commercial property, 1st edition. This statement will supersede the previous codes of practice that have been published as of 1st April 2019. Revisions in the RICS code of practice in recent years have sought to improve transparency in lease agreements. This latest statement goes one step further and introduces mandatory principles instead of acting as a guide. Despite this, any mandatory elements cannot override lease wording, so grey areas are not eradicated.

So what are the primary nine points of this document and what do they practically mean for commercial landlords and building owners?

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

This point increases the importance of wording in lease renewals. Both for the benefit of tenant and landlord, it is imperative to be explicit and cover every eventuality within the wording of your lease agreement.

2. Subject to section 4.2.7 (which covers fixed percentages), 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.

Ongoing management of utilities and services is key here. The responsibilities of the landlord to fully account for the services that are included in their lease is paramount. This aspect of the work can be labour intensive and is where a commercial property manager’s skills come to the fore.

3. Owners and managers must ensure that service charge budgets, including appropriate explanatory commentary, are issued annually to all tenants.

Annual accounting and supply of budgets may seem like tiresome work but is not only for the benefit of the tenant. This level of accounting will make future planning as a landlord much more straightforward.

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.

A professional property manager will maintain detailed records as a matter of course. The added value of a bespoke management programme for a portfolio is clear here.

5. Owners and managers must ensure that a service charge apportionment matrix for their property is provided annually to all tenants.

Support and communication is vital for a positive ongoing relationship between landlord and tenant. These suggestions of transparency are a great way to implement this clarity.

6. Service charge monies (including reserve and sinking funds) must be held in one or more discrete (or virtual) bank accounts.

Account management can be complex across a portfolio of properties. Reserve funds are a vital insurance both for the benefit of landlord and tenant. Under the supervision of an experienced professional, you can be sure that your property is protected.

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.

Feeding accounting back into the health of the property is a benefit to both building owner and tenant. A commercial property manager is able to manage this in an effective way so that your property investment can be developed to maximise its future earning potential.

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.

Clearly, disputes are best dealt with by avoidance rather than resolution, so clarity in the original lease negotiation and wording is vital. When disputes do occur, commercial agents can help to negotiate a workable solution within the bounds of a lease agreement.

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.

Efficient responses to the income and outgoings of a property extend to more than the accounting involved in any disputes. Delays can often come down to lack of HR resources on behalf of a landlord. Therefore, by seeking a bespoke management service, the business of property letting becomes more streamlined.

At Curchod & Co we believe effective property management enhances the enjoyment of your property. We provide a personal solution via our multi-disciplined practice. Whatever the property, commercial or residential, our Property Management specialists can advise. We manage all types of property management with a bespoke service to ensure the best performance of your investment portfolio ensuring that you keep up with changing regulatory legislation the primary care of your tenants and maintenance of common areas.

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