News & Bulletins
Service Charges in Commercial Properties
Jon Durham
Commercial property is an important area of the UK economy and
service charges can be a major outlay for tenants. Poorly managed
services are a frequent cause of disputes between commercial
landlords and tenants. RICS has led a cross industry steering group
in devising a new Code (RICS Code of Practice: Service Charges in
Commercial Property) in an effort to produce a clear set of
recommendations which it is hoped, if implemented, will benefit all
parties involved in commercial leases.
1 April 2007
Residential service charges are regulated by statute but until
now commercial service charges have been governed by the terms of
the individual lease only. The Code comes into effect for
commercial/mixed use service charges commencing on or after 1 April
2007. It has been given Guidance Note status by RICS, meaning all
chartered surveyors have to follow its provisions as best practice,
justifying any departure from it. Existing leases cannot be
overridden by the Code and the provisions of the lease will always
prevail. It is therefore hoped parties to leases granted from 1
April will agree to bring leases in line with the best practice set
out in the Code. The Code recommends managers comply with the Code
as far as possible despite the constraints of the lease.
The Code
The Code’s objectives are that service charges should: be
removed as an area of conflict between landlords and tenants; be
“Not for profit, not for loss”; provide a budgeted/forecastable
part of the tenant’s overheads, and; be cash neutral to the
landlord’s income stream.
Various issues are addressed by the Code including the duty of
care owed by landlords to manage the property, the best practice in
management and written performance standards in contracts for
services. The main problem areas identified in the landlord/tenant
relationship were communication and transparency and the Code seeks
to alleviate these issues by recommending tenants are provided with
timely and regular information and are also included in the
process.
Other recommendations within the Code
include:
Leases should incorporate the right to change apportionments of
service charges during the term.
- There should be the ability to use ADR in service charge
disputes.
- Service charge provisions should be updated on a renewal under
the Landlord & Tenant Act 1954.
- Management fees should be an actual justifiable figure and not
merely a percentage of the service charge.
- Strict timescales must be adhered to.
- The parties should recognise the landlord owes tenants a duty
of care as it is their money he is spending.
- Improvements/enhancement to the property should be allowed if
they are cost effective and make economic sense to the
tenants.
Further changes?
The 1954 Act provides that in renewals under the Act new leases
may only depart from the terms of the existing lease if it can be
demonstrated modern practice has changed and it is reasonable to
incorporate the changes [O’May v City of London Real Property
Company (1982)]. It is hoped as the Code is implemented more widely
the courts will be persuaded that it reflects modern practice and
provisions which refer to it should therefore be allowed in renewed
leases.
A mezzanine floor can distort apportionments of service charges.
At this stage little is known of the effect of such floors in terms
of rent or service charges but the authors of the Code hope further
research is carried out so best practice can be drawn up in this
area.
What now?
It is hoped landlords, tenants and their professional advisers
will endeavour to agree to align new leases with the Code when
negotiating Heads of Terms. How to incorporate the Code within the
service charge provisions in the lease will need careful
consideration at the drafting stage. There may be additional
problems with 1954 Act lease renewals and also new leases where all
other leases in the building have identical service charge
provisions. It has been suggested that in buildings where the
leases come up for renewal at different times the existing service
charge should remain until half of the leases have been renewed, at
which time the Code can be incorporated by way of an additional
schedule in all of the leases.
Jon Durham - January
2007
Date:
January 2007
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