Sue Highmore and Peter Forrester review the latest RICS guidance on service charge handover procedures
One of the areas to cause greatest grief on the sale of a multi-let commercial property can be the failure of the parties to ensure a seamless handover of the service charge between the outgoing and incoming managing agent. This can lead to over-billing (and invariably irate tenants), under recovery (with consequent reduced investment performance) or increased costs. The same problems can arise where an existing owner simply changes agent.
In 2011, the RICS published an information paper that hoped to set the standard for a smooth handover. The idea was to encourage others to adopt the de facto standards that good managing agents already achieved by negotiation or their in-house service standards.
Transition to a guidance note
The information paper has been reviewed and reissued, in draft, as a guidance note, with practitioners able to comment until 5 January. This will carry more weight because the RICS standards define a guidance note as “providing users with recommendations for accepted good practice as followed by competent and conscientious practitioners”. The revised version will provide new incentive for managing agents to:
● adopt the principles it sets out (so as to have useful evidence with which to resist any allegation of negligence or disciplinary action); and
● insist that lawyers draft the sale contract or management contract to reflect the principles. Most standard precedents will need adaptation to achieve this, as they are light on the detail for service charge handover; leaving it instead to the managing agents to work out on the ground. The draft guidance note refers frequently to the need to include the obligations in the sale contract.
The aims of the old information paper are unchanged, as are most of the detailed mechanics of handover. The guidance sets out a comprehensive list of the information that should be supplied to the new agent. Some of this has been amended to reflect the terminology in the third edition of the RICS Code for service charges in commercial property (for example, the reference to service charge budgets and to the review of service charge accounts, rather than a full-blown independent audit). It is worth practitioners looking through the information that will be required, to make sure that their management systems will be able to produce this easily and quickly.
New guidance
The other major differences that have been introduced in the draft guidance are:
Time limits for provision of information (section 2.1 and others)
Deadlines are now expressed in working days (which makes the periods look shorter, when in fact they are the same). There are still three prime trigger points by which information has to be supplied: before completion; within five days after completion and within four months after completion. There are clear lists of which information has to be supplied by which point.
The new version adds a fourth trigger date. Where the change of agent happens as a result of sale of the property, reconciliation of the service charge accounts for previous service charge years (ie those that have not been finalised by the day of completion) must now be done within two months of completion (not the four months previously allowed).
Imposing penalties for failure to comply with the standards (section 2.1)
The draft guidance note gives much clearer direction to include, in the sale contract, sanctions if the deadlines are missed. It offers alternatives of a retention and a reasonable penalty clause. Both are rare in current sale contracts.
Guidance on VAT shortfall relating to voids (section 2.1.3)
There is a new section on VAT shortfalls which may arise where the outgoing landlord has to contribute to the service charge for void units, but cannot be billed for the VAT incurred on the expenditure rolled up in those contributions. This may precipitate the need for extra drafting in the sale contract obliging the seller to contribute (post completion) any relevant VAT shortfall for the current year. This is a complex technical issue that will need discussion with the managing agents for both parties before tackling the drafting.
Novation or assignment of supplier contracts (section 3)
This section has been completely rewritten, to make it clear that there is no expectation that the buyer will achieve novation of such contracts unilaterally. Novation requires agreement of all three parties (supplier, original landlord/managing agent and new landlord/managing agent). The guidance note explains the need to check, before completion, which supplier contracts can be assigned and the conditions for doing so (for example, the necessary notice period). It reminds the outgoing landlord/agent that they will remain on the hook for those contracts that cannot be or are not assigned or novated.
Utility supply security deposits (section 2.1.7)
These are increasingly common, but sale contracts rarely refer to them. The guidance note is much clearer on what needs to be checked with the utility company. If the buyer will inherit the security deposit then the sale contract should require the buyer to reimburse the seller for a matching amount. If the buyer will not inherit it (perhaps because it intends to change supplier) then the seller or its agent must organise a refund.
It is expected that the guidance note will come into force in spring 2015. It will be interesting to see how quickly management practices adopt the principles it recommends.
The draft is available at https://consultations.rics.org/consult.ti/service_charge_handovers/consultationHome
and comments are invited until 5 January.
Peter Forrester is chair of the RICS Service Charge Steering Group and Sue Highmore is an editor at Practical Law Property
