RICS SERVICE CHARGE CODE PROFESSIONAL Richard Cressall Kara Davies Gordons LLP 13 November 2018
Overview This session provides a crucial update on the new Professional Statement, outlining the mandatory elements and how they will impact your professional practice and that of your clients. Aims and objectives of the professional statement Code of practice the core principals The mandatory requirements
Where can I find a copy of the Service charges in commercial property 1 st edition? https://www.rics.org/uk/upholding-professional-standards/sector-standards/real-estate/service-chargesin-commercial-property-1st-edition/
What is the Professional Statement? The Service Charges in Commercial Property 1 st edition (September 2018) The Professional Statement sets out markers for the standards required in commercial property and provides mandatory obligations that RICS members and regulated firms engaged in this area must comply with. The professional statement will be effective from 1 April 2019 and will supersede the previous three edition of the Service Charges in Commercial Property which were published as codes of practice.
RICS tackles unfair commercial property service charges The new mandatory requirements are to ensure that service charges to commercial tenants are transparent, upfront and fair, and that any costs incurred are in accordance with the terms of the occupational leases. We have long called for a fairer and more professional approach to property management to help outlaw rogue landlords and managing agents. The launch of the RICS professional Statement Service charges in commercial property is a momentous step in helping to better regulate the activities of landlords and their agents, whilst protecting tenants from having to pay for unscrupulous repair or maintenance costs RICS Press Release 17.09.2018
Language differences between the Statement and the Code (3 rd edition) The Code (3rd Edition) Less robustly worded due to status - contains best practice and recommendations only (i.e. words such as are expected and are advised are used). Statement Definitively worded due to mandatory status (i.e. words such as should and must are used).
Do I need to take notice of the professional statement? Yes and this applies to: RICS Members Part II Personal and Professional Standards Rules of Conduct for Members 04 June 2007 version 6 With effect from 01 January 2013 RICS Regulated Firms Part II Conduct of Business Rules of Conduct for Firms 04 June 2007 version 6 With effect from 25 April 2017
Application of the RICS professional statements RICS will take into account relevant professional statements in deciding whether a member acted professionally, appropriately and with reasonable competence. RICS further adds: members should only depart from the best practice requirements for justifiable reasons that there may be legislative requirements or regional, national or international standards that have precedence over an RICS professional statement In legal proceedings a judge, adjudicator or equivalent may take RICS professional requirements into account
What are the 9 mandatory requirements? 1. all expenditure that the owner and manager seek to recover must be in accordance with the terms of the lease 2. subject to instances where the amount of the overall service charge costs the occupier pays are fixed at the time the lease is granted, owners and managers must not seek to recover more than 100% of the proper and actual costs of the provision or supply of the services 3. owners and managers must ensure that service charge budgets, including appropriate explanatory commentary, are issued annually to all tenants 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 5. owners and managers must ensure that a service charge apportionment matrix for their property is provided annually to all tenants
What are the 9 mandatory requirements? 6. service charge monies (including reserve and sinking funds) must be held in one or more discrete (or virtual) bank accounts 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 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, and 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
What are the core principles? 24 core principles which reinforce and add a little more practical detail to the mandatory requirements: service costs allocation and apportionments duty of care financial competence occupiers responsibility right to challenge/alternative dispute resolution timeliness transparency value for money, and exclusions
Summary of the main differences between the Statement and the Code (3 rd edition) The Mandatory Requirements Recoverable percentage The Code (3rd Edition) Silent on the specific percentage that may be recovered Statement 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, save in instances where the amount of the overall service charge costs the occupier pays is fixed at the time the lease is granted. aims to cover instances where the amount or percentage of the overall service charge costs the occupier pays is fixed at the time the lease is granted. While a fixed percentage or amount can make dealing with the service charge more straightforward and simple, this method is inflexible.
Summary of the main differences between the Statement and the Code (3 rd edition) The Mandatory Requirements Annual budgets The Code (3rd Edition) recommends that managers should issue budgets to occupiers, including an explanatory commentary, at least one month prior to the start of the service charge year. Statement owners and managers must issue service charge budgets to tenants annually, including appropriate explanatory commentary.
Summary of the main differences between the Statement and the Code (3 rd edition) The Mandatory Requirements Apportionment matrix The Code (3rd Edition) recommends that managers are expected to make available to all occupiers a full apportionment matrix that clearly shows the basis of calculation and the total apportionment per schedule for each unit within the property/complex. There is no set time scale within which this must be done. Statement an apportionment matrix must be issued annually to all tenants. CP21 stipulates that managers must now issue to occupiers, an apportionment matrix at least one month prior to the start of the service charge year.
Summary of the main differences between the Statement and the Code (3 rd edition) The Mandatory Requirements Bank accounts The Code (3rd Edition) CP15 recommends that service charge monies are held in one or more discrete bank accounts in recognition of the fact the monies are being held to provide for the procurement and delivery of the services. BPP7 recommends that monies accumulated in a sinking or reserve fund are held in one or more separate discrete bank accounts to be maintained in trust for the occupiers. Statement mandatory requirement for service charge monies (including reserve and sinking funds) to be held in one or more discrete (or virtual) bank accounts. The Statement has introduced the concept of virtual bank accounts, being a subsidiary or subaccount of a physical bank account that allows segregation of funds, eg in respect of individual properties, from other funds in the same account or alternatively where funds can be clearly identified through the use of separate ledgers.
Summary of the main differences between the Statement and the Code (3 rd edition) The Mandatory Requirements Sums in dispute The Code (3rd Edition) CP18 recommends that where a legitimate dispute exists, any payment properly withheld should reflect only the actual sums in dispute. Statement when acting for the tenant, practitioners must advise that if a dispute exists any service charge payment withheld by the tenant should reflect only the actual sums in dispute. The wording of this requirement has been simplified and the terminology legitimate and properly have not been used presumably to avoid the prospect of disputes in interpreting their meaning.
Summary of the main differences between the Statement and the Code (3 rd edition) Core principles and best practice recommendations Occupiers responsibilities The Code (3rd Edition) CP18 recommends that occupiers are obliged to ensure prompt payment of all service charge onaccount and balancing charges. Statement CP15 dictates that occupiers should ensure prompt payment of all legitimate service charge onaccount and balancing charges. In contrast to the simplification of MR8 above, this introduces the prospect of a dispute over what is a legitimate charge.
Summary of the main differences between the Statement and the Code (3 rd edition) Core principles and best practice recommendations Adjustment after resolution The Code (3rd Edition) Silent Statement when acting on behalf of a landlord, practitioners must advise that following resolution of a dispute, any service charge raised incorrectly should be adjusted to reflect the error without undue delay.
Summary of the main differences between the Statement and the Code (3 rd edition) Core principles and best practice recommendations Handover procedure The Code (3rd Edition) Referred to, and previously available as, a RICS information paper Commercial property service charge handover procedures (2011). Statement New appendix to the Statement: Commercial Property service charge handover procedure.
Summary of the main differences between the Statement and the Code (3 rd edition) Core principles and best practice recommendations Exclusions CP24 dictates that service charge costs should not include any of the following: Any initial costs (including the cost of leasing of equipment) incurred in relation to the original design and construction of the fabric, plant or equipment any setting up costs, including costs of fitting out and equipping the on-site management offices that are reasonably considered part of the original development cost of the property any improvement costs above the costs of normal maintenance, repair or replacement. Service charge costs may include enhancement of the fabric, plant or equipment, where such expenditure can be justified following an analysis of reasonable options and alternatives, and with regard to a cost-benefit analysis over the term of the occupiers leases. Managers should provide the facts and figures supporting such a decision future redevelopment cost costs and fees relating to the owner s investment interest, for instance, asset management and rent collection, cost of letting units and matters between the owner and an individual occupier. This last category may include activities such as enforcement of lease covenants, dealing with landlord consents for assignments, sub-letting, alterations, rent reviews, additional opening hours, etc costs attributable to void premises and the owner s own use of the property, and any costs arising out of the negligence of the manager or owner
10 things to remember about the new commercial property code 1. The new regime comes into force on 1 April 2019 2. The new code affects commercial property only 3. The new code is a professional statement 4. Existing leases are unaffected by the professional statement 5. Tenants must now receive annual updates 6. Any costs recovered must be in line with the terms of the lease 7. Service charge payments must be held in a bank account 8. There is a greater emphasis on the resolution of disputes 9. Disputes should be resolved quickly and efficiently 10. The new code introduces a service charge handover procedure
RICS SERVICE CHARGE CODE PROFESSIONAL Does it make any difference? A little bit of law to round off your evening
Any questions?