The second edition of the Royal Institution of Chartered Surveyors (RICS) Service Charge Code for Commercial Property (“the 2011 Code”) became effective from 1st October 2011.
The 2011 Code updates the previous 2006 Code and sets out rules and guidance which are regarded as the benchmark of “best practice” for landlord and tenants in drafting and interpreting service charge provisions in both new and existing commercial leases. While there is no legal obligation to follow the 2011 Code, adherence to it will likely to be taken into account by the court if a dispute over service charges is litigated.
The overarching purpose of the 2011 Code is to seek to balance the interests of commercial landlords in ensuring that all proper costs can be recovered from a tenant and the interests of a tenant in ensuring a landlord provides a professional and cost effective service.
Key points of the 2011 Code to note include:-
• The 2011 Code imposes a higher threshold of financial competence required in preparing service charge accounts and insists that service charge budgets and expenditure accounts should be grouped into industry standard cost codes.
• Annual statement of service charge expenditure should be certified by the owner/manager and independently reviewed by an accountant. A formal audit is not required and a tenant should note that the cost of a formal audit will be passed on to them.
• The management of service charge should be run on a “not for profit” basis and reflect the actual expenditure properly incurred under the lease. Any management fee charged should be reasonable and not based on a percentage of the service charge expenditure.
• The 2011 Code repeats and highlights the importance of the timelines stated in the 2006 Code that budgets should be issued at least one month prior to the service charge period and reconciled accounts issued within four months of the end of the service charge year.
• “Sweeper Clauses” which entitle the landlord to recover monies for any other service it provides should be used with caution. A sweeper clause cannot be used to cover the cost of something left out of the lease in error.
• A clear emphasis is placed on communication and the importance of Alternative Dispute Resolution in the 2011 Code. Landlords should be proactive in consulting with tenants about service charge costs and there should be clear provisions in the lease regarding settling disputes by ADR.
• Landlords and tenants should both have regard to the environmental impact of their operation and sustainability issues.
Whether the new provisions and guidelines will be adopted by commercial parties in practice is yet to be seen and there is continued debate as to whether the service charge Code is truly effective in regulating service charge practices. However, the advent of the updated Code places renewed scrutiny on service charge provisions and its rules and recommendations should be heeded by landlords, tenants and practitioners alike.
Please note that this information is provided for general knowledge only and therefore specific advice should be sought for individual cases.
For further information, please contact Andrew Nicklinson at or Philip Shotter at
