RICS updates commercial property service charge Code

06 May 2011

RICS has launched the second edition of Service Charges in Commercial Property Code of Practice.

This Code of Practice is intended to remove service charges as an area of conflict between commercial property owners and occupiers.
Building on the standards announced in the initial Code, the updated guidance now requires occupiers to be proactive in their communication with managers and investors. Furthermore, issues around sustainability are addressed for the first time. Compliance with the Code also requires the adoption of the Industry Standard Cost Classifications.
The updated Code is endorsed by leading industry bodies and builds on the themes of the first edition with greater emphasis on communication, timeliness and transparency between commercial property owners and occupiers. Also available in the new code are two ‘model lease clauses’ to help the legal profession ensure these standards are being met in new and renewal leases.
Key areas of updated the code include:
• Similar the first edition, the updated Code gives occupiers the right to challenge service charges. To do this cost effectively, leases should include an Alternative Dispute Resolution (ADR) clause.
• The first edition of the Code introduced industry standard cost classification. Independent research shows that only 50 per cent of managers are complying with this. Adhering to the industry standard cost classification is essential if effective benchmarking of service costs is to be achieved.
• The cost of improving or equipping a building should not, generally speaking, be included in the service charge.
• Service charge operations should not be run to make either a profit or a loss, except for a reasonable commercial management fee.
• Service charges should be demonstrably fair and reasonable.
• Management fees should include a reasonable profit element to ensure the requisite element of professionalism.
• Alternative dispute resolution can play a key part in managing issues relating to the charges and delivery of services.
Chris Edwards, RICS spokesperson, sai, “Since the launch of the Code in 2006, it is fair to say that a greater degree of professionalism has been brought to the way investors provide and charge for services. However, more can still be done to resolve potential disputes. New elements such as the two example lease clauses included in the updated edition should help reinforce these standards from a contractual perspective, and ensure smoother relations between property owners and their tenants.”
Paul Bagust, RICS Associate Director, commented, “Research suggests that a significant proportion of occupiers remain dissatisfied with service charge management. This updated Code aims to improve relations between commercial property owners and their tenants when it comes to service charges. This new code builds on the first edition by prompting better communication, timely action and transparency, which will be of great benefit to both parties.”
Service Charges in Commercial Property is freely available from www.rics.org/servicechargecode