Surveyors and commercial service charges - the impact of the RICS Professional Statement
Commercial service charges a problem for GP practices.
Service charges are frequently a bone of contention between landlords and tenants, as has been illustrated recently by the large number of GP practices which are being pursued for some considerable and backdated sums. In many cases those GPs don’t have a written tenancy agreement and, in the context of commercial service charge disputes, this may prove problematic.
Service charges are purely a matter of contract with the parties, theoretically at least, deemed to be on an equal footing and capable of striking a fair and realistic bargain. The service charge provisions must be expressly contained within the agreement in order for them to be enforceable. If there isn’t a written agreement, one questions how a landlord may assert that service charges are lawfully owing.
Non-payment by the tenant may result in enforcement action being brought by the landlord. Conversely, any failure by the landlord to provide the services may entitle the tenant to withhold payment of sums demanded. Ultimately, it may fall to a judge to decide how much the landlord is owed and legal costs may be awarded against the unsuccessful party.
Faced with this ‘litigation risk’, after a certain amount of initial posturing, the parties will often come to an agreement between themselves. This is always to be encouraged, particularly as the court will expect the parties to prove that they tried to settle matters amicably before issuing proceedings.
Often the input of qualified surveyors will be needed to assist the parties in understanding what can be complex and technical disputes. Where those surveyors are members of the RICS or are employed by a regulated firm, then the RICS Professional Statement on Service Charges (“the Statement”) will have a significant impact on the manner in which advice is given, and the manner in which disputes will be handled. It is imperative that landlords and tenants, and their advisers, are aware of the impact of the Statement.
The aims of the Statement
The Statement came into force on 1 April 2019. The aims of the Statement are transparency, fairness and uniformity in the management and administration of service charges for commercial properties.
The Statement includes nine mandatory requirements for RICS members and RICS regulated firms, which surveyors and regulated firms must comply with as a matter of professional conduct.
The nine mandatory requirements
- All expenditure that the owner and manager seek to recover must be in accordance with the terms of the lease. Therefore, if there is only an oral periodic tenancy, one questions how a RICS surveyor could contend, in his or her professional opinion, that services charges claimed are lawfully due and owing.
- Unless the lease requires payment of a fixed amount towards service costs the surveyor cannot seek to recover more than 100% of the proper and actual costs of the landlord in the provision or supply of the services.
- Service charge budgets, including appropriate explanatory commentary, must be issued annually to all tenants.
- Reconciled service charge accounts showing a true and accurate record of the actual expenditure constituting the service charge must also be provided annually to all tenants.
- A service charge apportionment matrix must be provided annually to all tenants.
- Service charge monies (including reserve and sinking funds) must be held in one or more discrete (or virtual) bank accounts.
- Interest earned on service charge accounts must be credited to the service charge account after appropriate deductions have been made.
- 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.
- 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.
Interaction with the terms of the lease
The Statement cannot override the terms of an existing lease. However, any existing clauses in a lease relating to service charges should be interpreted, as far as possible, in line with the Statement unless the lease specifically stipulates a different approach. Where provisions in a lease relating to service charges are unclear or inadequate, the requirements of the Statement should apply to manage the service charge process.
Consequences of breach
If a RICS member breaches the Statement, he or she may be subjected to disciplinary action from RICS and/or a civil claim for breach of duty by one or other of the parties.
Advice to landlords and tenants
Anyone involved in commercial landlord and tenant matters should be aware of the Statement and its impact on service charge disputes. If in doubt, legal advice should be sought as early as possible, to seek to avoid disciplinary and/or legal action.
For more information on the issues raised in this article, please contact Matthew Lake, Principal Associate on 0121 200 8124 or email Matthew.Lake@Weightmans.com.