The property industry has welcomed RICS’s new Commercial Property Service Charge Code of Practice.
The guidance launched last night with the aim of producing a more transparent and effective service charge system by addressing current concerns including the ability of landlords to ‘massage’ service charges.
Backed by commercial property bodies the BPF, the BRC, BCO, the BCSC and the PMA, it advises owners, occupiers and professional advisors to interpret leases as far as possible in line with the code, and to modernise leases during new lettings or renewals.
In addition to setting out best practice for commercial service charges, the new Code of Practice, which will be introduced in April 2007, aims to:
· deliver a budgetable and forecastable part of occupiers’ overheads
· ensure service charges that are ‘not for profit, not for loss’ and that are cash neutral to the owner’s income stream
· encourage transparency and communication in the relationship between landlords and tenants.
Chris Edwards, chairman of the RICS service charge steering group said: “We are delighted that all the major commercial property bodies have participated in the development of this code.
“Upgrading the code to official guidance status offers enormous strides forward in improving the standard of service charge management.”
Liz Peace, BPF chief executive, said: “Only when landlords take responsibility for the service standards their tenants receive will good practice be achieved.
“The guidance offered is deliberately challenging and will over a period of time, require significant changes to systems and practices, hence the need for a lead-in-period.
“Landlords, I am sure, will use the next 10 months wisely, to work with their agents to ensure the principles enshrined in the code are implemented in day to day practice.”
According to a Donaldsons report into office service charges over the past 20 years (see graph), in periods of rising rents and low levels of vacancy, there has been little incentive for landlords to control additional costs.
Donaldsons found that when office rents rose sharply service charges increased broadly with inflation but, when rental values plummeted in the recession, there was a short lag, whilst residual contractual commitments were worked out, before service charges were brought under control. Whilst inflation continued to rise, service charge costs started to reduce (see graph).
Charles Woollam, partner in the Donaldsons Corporate team, welcomed the code: “Currently, landlords set the service charges in line with market expectations in initial budgets for occupiers.
“Unfortunately, tenants don’t always find out what the actual costs are until a year or more after the lease is signed.
“Service charge practices have been unclear for too long, and tenants will welcome this new code of conduct from the RICS.
References: EGi News 27/06/06
