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Knowing which rules apply to a commercial lease can be difficult for both landlords and tenants. Similarly, they may experience confusion when it comes to the rules surrounding a service charge on commercial property. The Royal Institute of Chartered Surveyors (RICS) Code of Practice for Service Charges is the leading code on service charges for commercial property in the UK. RICS encourages and ensures the highest standards and qualifications are observed in construction works and land developments. RICS standards are recognised globally. This article will explain the RICS Code of Practice for Service Charges in the UK.
Service Charge
A commercial lease agreement may have a service charge provision. Commercial tenants typically share the commercial property they have leased with other businesses. Landlords spend money to maintain and run these shared parts of the commercial property. Commercial tenants will pay their landlord a service charge, as their lease agreement prescribes, to cover these costs.
Service charge amounts vary depending on the calculation method. Fixed service charges mean the tenant will only pay a pre-agreed specific percentage of the cost the landlord incurs. On the other hand, proportional service charges are calculated based on how much space the commercial tenant occupies within the commercial property.
RICS Code
Service charges often are the source of disagreements between commercial landlords and commercial tenants. Poor communication between the commercial landlord and the commercial tenant is often to blame. Accordingly, commercial landlords should consult the RICS Code as it provides valuable recommendations regarding service charges. Further to this, landlords should take the opportunity when a lease is due for renewal to make the appropriate changes to the lease agreement to ensure it is compliant with the RICS code.
Professional bodies consider the RICS Code to reflect best practices. Courts, in professional negligence cases where the landlord is the subject, will consider if they followed any guidance provided by the RICS Code. Commercial landlords, as such, have an incentive to ensure their lease agreements comply with the RICS Code. Service charge provisions that are not compliant with the RICS Code will even be read and understood in line with the Code. Commercial leases that have a legal requirement which states otherwise will likely be exempt.
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Content of the RICS Code
The content of the RICS Code of Practice for service charges in commercial property consists of a code of 86 paragraphs which cover the following topics:
- management;
- communications;
- transparency;
- service standards and provisions which cover service charge costs and value for money;
- administration; and
- additional shopping centre services, which are divided between marketing and promotions and non-core income.
The RICS Code aims to minimise service charge disputes between the commercial landlord and commercial tenant by providing guidance on the best practices in relation to these topics.
The Administration section of the code covers the following areas:
- management fees;
- apportionment;
- budgets/accounts;
- change of owner or agent;
- sinking, replacement and reserve funds;
- interest on service charge accounts.
The RICS Code also provides technical support for landlords regarding service charges in commercial lease agreements. This support helps commercial landlords carry out tasks that may arise as a result of service charges. Technical support the RICS Code provides includes:
- performance contracts;
- initial provision, improvement and refurbishment of equipment;
- treatment of non-core income;
- standard methods of apportionment;
- apportionment schedules;
- sinking and reserve funds;
- cost code analysis;
- dispute resolution and management charges;
- methods of apportionment; and
- advice on how to treat non-core income.
This cheat sheet outlines what you should be aware of in your lease agreement.
Key Takeaways
In summary, commercial landlords or commercial tenants with a commercial lease are well advised to know the RICS Code. The RICS Code, while not legally binding, contains best practices regarding service charges in commercial leases. Commercial tenants and landlords are encouraged to ensure their commercial lease is compliant with the Code. The Code contains 86 paragraphs of good practice concerning various areas, such as communications and transparency. In addition, the code provides technical support for commercial leases, such as how to treat non-core income.
If you need help with understanding the RICS Code, contact our experienced leasing lawyers as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A service charge is where a commercial landlord charges their tenant a fee to cover the costs they incur to maintain the shared areas in the commercial property.
The RICS Code of Practice for Service Charges in Commercial Property is a guidance note on best practices concerning service charges in commercial leases. It covers a range of topics relevant to service charges, such as transparency, communication, management and appropriate costing.
The RICS Code is important to understand as it reflects what professional bodies consider best practice. As a result, it affects commercial landlords’ duties and the repercussions they may face if they do not comply. For example, in professional negligence cases, where the landlord has not upheld their duty of care to the tenant, the courts will consider if they followed any guidance provided by the RICS Code. For service charge provisions in a commercial lease, they may be read and understood in line with the RICS Code if they are not compliant.
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