Date 12 September 2011
It is common practice for leases, whether they be of a commercial or residential nature, to contain service charge provisions. Service charges are levied by landlords to recover the costs they incur in providing services to a property. When drafting a lease, it is important to ensure that the service charge provisions provide for the fairness and transparency of the charges. Incourt, practice, there is a great variation in clarity and this can lead to disputes between the parties.
Such a dispute came before the Court in the case of Princes House Ltd v Distinctive Clubs Ltd [2006], a leading authority on the matter. The case concerned an attempt by a landlord to recover from its tenant service charges under provisions that, at best, lacked clarity. The landlord’s case was not helped by its advisors having been less than transparent as to the nature and breakdown of the charges.
The judge in that case, His Honour Judge Gaunt, noted that tenants are heavily reliant on professional advisors instructed by landlords to oversee the process of administering service charges. He went on to say that regardless of the types of professional involved, whether they be accountants instructed to prepare a set of accounts or surveyors instructed to survey a premises, it is too often the case that they try to “recover as much money as they can for the landlord”. This inevitably leads to unnecessarily high costs for the tenant as the landlord tries to extract the maximum amount from the tenant by way of service charge, sometimes with scant regard as to whether the sum claimed can be justified.
These comments came as no surprise to property professionals. In 2006, in an attempt to bring some parity to the playing field, the Royal Institution of Chartered Surveyors produced a Code of Practice for Service Charges in Commercial Property (“the Code”), a second edition of which is due to come into effect on 1 October 2011.
The Code encourages parties, be they owner, occupier or manager, to adopt a “best practice” in a landlord and tenant situation and provides a framework of procedures and practices to adopt when considering service charge provisions in new leases or when renewing a lease.
The intention of the second edition of the Code is to improve general standards and to promote best practice, uniformity, fairness and transparency in the management and administration of service charges in commercial property. The Code states that landlords should not profit from the provision or supply of services, save for charging a reasonable commercial management fee to reflect the actual costs incurred in the provision or supply of these services.
The Code is at present voluntary and a disappointing number of landlords have fully embraced its recommendations. However, if landlords continue to ignore the core principles set down in the Code, Government may well intervene and legislate to enshrine the spirit of the Code in law. Should that happen, such legislation could impose more onerous obligations on landlords than the current Code, so the current state of inertia could backfire on landlords.
Until then, we can only watch developments as they occur and advise clients in line with the guidance provided for in the Code. As things stand, it will be up to individual landlords as to whether or not they adhere to the Code, but they would be well advised to bear in mind that they ignore it at their peril!
Stay tuned to the next Real Estate Stay Alert! e-newsletter which will include an article detailing the changes to the amended code. To sign up to recieve the Stay Alert, click here.
© SA LAW 2011
Every care is taken in the preparation of our articles. However, no responsibility can be accepted to any person who acts on the basis of information contained in them. You are recommended to obtain specific advice in respect of individual cases.