Most commercial landlords will know that the Royal Institute of Chartered Surveyors (RICS) has now introduced their Service Charge legislation.
Effective since 1 April 2019, the mandatory new laws are far more specific than the previous ‘best practice’ advice – especially when it comes to disputes between landlords and tenants.
This article will aim to explain why it’s in the best interests of both parties to know exactly where they stand – and includes:
· Service Charge laws now applicable
· Why the measures have been introduced
· The effect on commercial landlords
· The potential benefits for tenants
Which service charge laws are now mandatory?
The RICS-issued Service Charge professional statement is now recognised by law in the UK and includes the following mandatory requirements:
· Any expenditure a landlord wants to charge for must be in accordance with the terms of the lease.
· Landlords cannot recover more than 100 per cent of the costs of the provision of services.
· Landlords must give tenants an annual service charge budget, including an appropriate commentary explaining the fees.
· Landlords must give tenants an approved set of service charge accounts every year which is a real and accurate record of actual expenditure.
· Landlords must give tenants an annual service charge apportionment matrix for their property.
· All service charge monies – including reserve and sinking funds – must be held in one or more discrete (or virtual) bank accounts.
· All interest earned on service charge accounts must be paid into the service charge account.
· Practitioners acting for tenants must tell them that if a dispute exists any service charge payment which is withheld should only be the actual sum in dispute.
· Practitioners acting for landlords must tell them that following the resolution of a dispute any incorrect service charge should be adjusted immediately.
Why have they been introduced?
According to RICS, the new Service Charge laws have been introduced for five main reasons:
· Improve standards, fairness and transparency in relation to service charges.
· Reduce the main cause of landlord-tenant disputes.
· Provide guidance on the resolution of disputes if they arise.
· Give solicitors and their clients complete clarity about service charges during the negotiation and drafting of leases.
· Ensure the timely issue of year-end certificates and budgets.
Whilst RICS hope their new Service Charge guidance statement will improve the standards delivered by commercial landlords, they also want it to provide complete accountability about where and when tenants’ money has been spent.
How will landlords be affected by the 2019 Service Charge laws?
In our experience, most commercial landlords were already compliant with the principles of the existing code when it was a voluntary process.
Unfortunately, we’ve heard examples where best practice was ignored, causing stress and worry for tenants.
The new rules, which apply to RICS members and regulated UK firms, will help make the whole topic of service charges much clearer.
In previous years, there was nothing to prevent a landlord from recovering costs they believed were owed dating back several years (unless a lease stated otherwise) – a practice which often had a major negative impact on a tenant’s cash flow.
Since the laws have become mandatory, landlords must be much stricter with regards to deadlines for budgeting and settling service charge accounts – which must be reconciled annually.
The fact it’s now easier to compare service charges on different buildings is one of the biggest advantages for landlords who are looking to buy or lease a commercial property.
However, it’s important for RICS members to be aware that if they fail to adhere to the new laws and a serious dispute arises, they could leave themselves open to a professional negligence claim.
How will tenants be affected by the Service Charge laws?
Being more transparent with service charges should mean tenants are now far more informed about their rights.
The service charge matrix also allows them to see exactly how much they are paying and for what service.
Should they be unhappy with the amount they pay, a tenant may feel more confident to highlight any issues or request a fees amendment when carrying out lease renewal proceedings under the Landlord and Tenant Act 1954.
It should also put an end to the practice of landlords trying to hide any shortfalls (often due to a capped or fixed service charge incentive) by recovering the sum from other occupiers.
If you need to discuss or resolve a service charge issue, please email firstname.lastname@example.org or call 01482 564564 for impartial professional advice.
By Simon Preston
Commercial Management Surveyor
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