Date 24 October 2011
As discussed in our earlier Stay Alert, the Royal Institution of Chartered Surveyors produced a Code of Practice for Service Charges in Commercial Property (“the Code”), a second edition of which took effect on 1 October 2011.
The Code sets out best practice principles in the management and administration of service charges in commercial property. The Code comprises of Core Principles supported by notes on specific topics and illustrations as to how the principles outlined in the Code can be achieved and the advantages of complying with these. I have outlined the key points in which owners, managers and occupiers should keep in mind when negotiating commercial leases.
Management
The Core Principles outlined in the Code require service costs to be procured on an appropriate value for money basis and effective service should be the main concern of the manager/owner as opposed to obtaining the lowest price possible. The manager or landlord should obtain competitive quotations, the costs of which are to be communicated to the occupier at the earliest opportunity.
The Code covers the duty of the owner to manage the property and outlines what management charges are recoverable by way of service charge. The management charge might comprise of the following:
- Fee charged by the manager for the management of the premises;
- Supervision of the services to a site; and
- Cost of site specific management staff.
The management fee charged should be for “reasonable costs and overheads in relation to the operation and management of the services” and should reflect the work necessary to fulfil the principles of the Code. It is considered appropriate to recover a reasonable profit element. Other costs such as asset management and rent collection should be excluded from the service charge management fee. The Code also requires the fee to be set on a fixed price basis rather than being calculated as a percentage of expenditure.
In addition to the above, the owner has a duty of care to ensure that the standard of services provided are monitored and that the quality and cost of the services are regularly reviewed.
The Code recognises a duty of care the manager owes to the occupier and as such requires a higher emphasis to be placed on the quality of service provided to the occupiers. This also limits the recoverability of the service charge to the proper and actual cost incurred in the provision or supply of services.
This requires all costs to be transparent so that all parties, owners, occupiers and managers are aware of how the costs are made up.
Communications and Consultation
The Code places a duty on both managers and owners to consult and communicate with the occupiers with regard to the standard and quality of service charge provisions. The management should communicate with the occupiers to ensure services are delivered effectively for the benefit of all so as to ensure occupiers understand what they can expect to receive and how much they are required to pay.
Transparency
Transparency is essential to achieving good communication between owner/manager and the occupiers. It is hoped Transparency in the service charge accounts and information provided to occupiers will help to avoid disputes arising.
Standard and Quality of Service Provision
The manager should act with “professional care, diligence, integrity and objectivity” in providing the services on behalf of the owner to the occupiers.
Service charge cost will be restricted to charges and associated administrative costs properly incurred by the owner in the operational management of the property. This includes the reasonable cost of maintenance, repair and replacement (where beyond economic repair) of the fabric, plant, equipment and materials necessary for the property's operation.
Service charge costs will not include:
- any initial cost incurred in relation to the original design and construction;
- any setting up costs;
- improvement costs above the cost of normal maintenance, repair or replacement;
- future development costs;
- costs that are matters between an owner and an individual occupier such as rent collection, consents for assignments, sub-lettings, alterations, dealing with rent reviews etc; and
- any costs arising out of the failure/negligence of the manager or owner.
Service charge costs may include enhancement of the fabric, plant or equipment where such expenditure can be justified following the analysis of reasonable options and alternatives by the manager.
Budgets
The Code sets down time limits for the issuing of service charge budgets (one month prior to the commencement of the service charge year) and year-end accounts (within four months of the year end). The accounts should include an adequately detailed and comprehensive summary of items of expenditure with full explanations of any material variations.
The Code recommends that owners will allow occupiers a reasonable period (e.g four months) in which to raise queries in respect of the certified accounts and will deal with reasonable enquiries promptly and efficiently.
Right to Challenge/Dispute Resolution
The Code recommends that new leases (including renewals) should make provision for either party to require the resolution of disagreements through the use of Alternative Dispute Resolution (ADR) to allow parties to cost-effectively settle disputes in service charge matters. If the parties cannot agree a mediator or independent expert for the purposes of conducting ADR, the President of the RICS should (on request) nominate a suitable person. Where leases do not specify the requirement to use ADR, parties are reminded that there is nothing to stop the parties from agreeing to use ADR to resolve the dispute.
Conclusion
This edition of the Code is now in a much clearer format which will be easier for parties to adopt and with which to comply.
As discussed in our previous Stay Alert, the Code is at present voluntary and a relatively low number of landlords have fully embraced its recommendations. That may be a reflection on the balance that has been struck in the code but is more likely due to landlords simply ignoring what are at present voluntary proposals. 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 take a long-term approach.
If you would like more information or advice relating to a specific matter, please do not hesitate to contact David Linklater on 01727 798097 or by email at david.linklater@salaw.com or any member of the Property Litigation team.
© SA LAW 2011
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