Service Charges in Commercial Property Leases

A new Code of Practice, relating to commercial property service charges, was introduced by the Royal Institution of Chartered Surveyors (RICS) on 1st April 2007.

The Code aims to prevent disputes between landlords and tenants, relating to service charges. It is ground-breaking in its encouragement of communication and transparency.

The Code contains advice and recommendations but is not obligatory. Instead, it is attempts to regulate management of service charges, without the need for legislation or intervention by the Courts.

Although the Code will not override service charge provisions in a lease, it is hoped that by following the Code, disputes can be avoided.

Communication
A landlord is encouraged, at least one month prior to the start of a new service charge year, to provide a service charge budget, specifying reasons for charges being made.

Transparency
The landlord is also invited to issue certified accounts to the tenant, within four months of the end of a service charge year. This will allow the tenant an opportunity to raise any queries relating to the charges.

Further, the landlord should warn the tenant, as soon as possible, if it appears that the charge will be more than two per cent higher than that initially predicted.

Action

Both parties should, at the drafting stage, play an active part in agreeing service charge provisions in a lease which are both predictable and reasonable.

In the case of an existing lease, where the tenant is obliged to accept previously agreed provisions, the Code may still assist in interpretation.

There is little current incentive (other than the risk of judicial challenge) for a landlord to provide value in relation to services. The Code contains recommendations to landlords, encouraging them to act reasonably.

Compliance

Provisions in the Code should not prove problematic for reasonable landlords, those who accept that the system should be “not for profit, not for loss” and should not be used to top up rental income.

Where disputes arise, the Code encourages parties to use methods of alternative dispute resolution, such as mediation, rather than referring matters to the Courts.

To this end, the RICS has established a panel of experts, to mediate or otherwise resolve service charge disputes.