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Service Charges – RICS Consultation

12/12/2014

The Royal Institution of Chartered Surveyors has issued a new version of its guidance on service charge handover procedures, which is currently in a consultation period.

Originally published in 2011 as an information paper, it has since evolved into a guidance note aimed at property owners, managing agents, purchasers, solicitors and accountants, when dealing with commercial properties subject to occupational leases.

The RICS already have a Code of Practice for Service Charges in Commercial Property, currently in its Third Edition, relating to the management and administration of service charges.  This separate guidance note is however aimed specifically at handover procedures, whether when a commercial property is sold or there is a change in management.

A new version has recently been issued and comments are welcomed until 5 January.  The latest version is aimed principally at dealing with some inconsistencies in the earlier version, giving clearer advice on how to approach the service charge in sale contracts, and promoting consistency with the existing Code of Practice.

The RICS is keen to encourage sellers to provide buyers with comprehensive and timely service charge information.  It sets out a series of procedures during the handover period to improve the process for all parties and to ensure the service charge continues to be administered in accordance with the principles of the Code of Practice as far as possible during and after the handover.

By encouraging parties to deal with the service charge more effectively in the sale contract and to improve the information shared pre-contract, it is hoped that all parties will benefit.  A smoother handover should occur for managing agents, and relationships between both buyers and agents with the occupational tenants should get off to a better start.  It also aims to minimise inconsistencies between the service charge demands issued by the seller and the buyer, and iron out any incorrect data.

The buyer will be keen to reduce the period for which they have to fund the service charge themselves if a credit balance has not been transferred from the seller, and will also be conscious of not wanting to request duplicate payments from the tenants.

Aside of how the service charge is approached in practice, the parties are encouraged to include more comprehensive provisions in the contract.  This could include procedures for the handover of information and the steps required, for example: reconciliation of the last years’ accounts; transferring any credit held to the buyer; recovery of arrears; handover of records of expenditure, sinking funds and service contracts.  These matters can also be assisted by the contract dealing with time limits and effective sanctions should the parties fail to comply.

This is important given that at the contract stage the service charge is often an unknown.  Whilst other payments under the leases may be fixed, such as annual rent, the service charge is based on budgets and historic information and it is often difficult to have an accurate picture of the exact liability of the tenants until it reconciled at the end of the service charge year.

It will remain to be seen whether more robust pre-contract enquiries will be developed to reflect the RICS’s suggestions.

Underlying these changes is the RICS’ objective of promoting industry best practice, and a general duty of care owed to occupiers of commercial property.  The management and administration of service charges affects all parties involved with the property and it will be interesting to see what comes out of the latest consultation.

For more information, please contact Rebecca Freeman on 01789 206924 or by email.

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