A Bellrock Group Company

Leases and the RICS Code: What do they say about the Code on Commercial Service Charges?

26 Sep 2017

The short answer is not very much.

Dr Andrew Holt, Professor of Accounting at MSU Denver (formerly of Kingston University) has, in conjunction with Property Solutions, undertaken a piece of research into the content of the service charge provisions in 90 commercial multi-let office leases.

A discussion paper was released some weeks ago and the final piece of academic research will be released in early 2018 but over the next few months we will be picking out certain elements of the findings and sharing them with the industry.

Now in its 3rd edition – and soon to be a 4th edition – the Code says the following about the lease under its “New leases” section:

It is recommended that owners, occupiers and their solicitors ensure the lease they sign reflects this Code, which will enable more effective, business-focused service charge management during the course of the lease. Terms should be relevant and appropriate recognising the length of the lease term, and the scale and type of property concerned. At the time of lease renewal, the service charge clauses will certainly require review and probably modernisation/updating. It is recommended that new leases be drafted with sufficient flexibility to allow for changes in best practice. (RICS, 2014)

It would therefore be nice to think that commercial office leases in the UK give the Code its proper place. It would be sensible to hope that if the Code embodies best practice then leases would, at the very least:

– when setting out how certain aspects of the service charge are handled embody the best practice in the Code in these provisions.

– undertake to abide by the guidelines set out in the Code or mention that they will attempt to do so.

In this short piece we will be picking up on the second of these two points – do office leases mention the Code and if so what do they say?

Out of 90 leases reviewed only 82 had a date of inception that came after the advent of the first such RICS commentary on Service Charges so 82 is the “maximum” number we could expect.

In fact only 11 of the leases mention an RICS Code at all and two of these refer to the Code on Measuring Practice. This means that only 9 of the relevant leases – that is 11% – mention the RICS Code and even then only two do so in a way that binds the landlord to abiding by it. Unfortunately in one of these leases it stipulates that the Landlord “shall comply with the RICS Code” but then goes on to specific exactly which Code – the 2007 version – meaning that strictly speaking the Landlord will only be tied to that edition and not the further updates to the Code.

The one lease therefore that gives the RICS Code any real weight stipulates that the “managing of the provision of services” should be “in line” with the RICS Code of Practice.

Of the seven other leases that mention the Code, six include provisions that indicate that it should act as a non-binding guide to the professional provision of services:

– “… using reasonable endeavours to provide such services in accordance with the current edition of the RICS Code of Practice for Service Charges in Commercial Property (where the provisions of the Code are reasonable).”

– “… will give you due regard to the provisions of the publication known as Service Charges in Commercial Property – A Guide to Good Practice, or any publication replacing or updating the same.”

– “Landlord should provide such services as it may be in its reasonable discretion choose to provide taking into account but not necessarily as to be bound by the principles of good estate management and the “Service Charge in Commercial Property : RICS Code of Practice 2007”.

– … to use all reasonable endeavours to provide in accordance with the principles of good estate management and the RICS Service Charge Code of Practice from time to time applicable …”

– “The landlord or the landlord’s surveyor shall act in an impartial manner having regard to the rules of natural justice and (where applicable) any relevant recommendation or guidelines published by the Royal Institution of Charted Surveyors”

– “ … wherever practicable to have regard to the edition from time to time current of the Code of Practice on Service Charge in Commercial Property published by the Royal Institution of Chartered Surveyors”

One final lease mentions the Code, but only regarding decisions about any additional services that should be provided on the building.

“Any other services relating to the building or any part of it provided by the landlord from time to time during the term and not expressly mentioned and the landlord shall have regard to the RICS Service Charge Code in this respect.”

In summary, even where commercial leases refer to the RICS Code on Commercial Service Charges, most do so in perfunctory and cursory manner, seeing its contents as a non-mandatory guide that may or may not be relevant to decisions regarding the management of the service charge process. Given that the Code ostensibly sets out Best Practice, it is puzzling why Landlords are so reticent to mention the Code, let alone be willing to be bound to its contents.