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Service charge code
John Martin, Director of Property Law Research with Pinsent Masons considers the new Service Code of Practice.
May 2007
On 26 June 2006, the RICS launched “Service Charges in Commercial Property: RICS Code of Practice”. This is based upon the second edition of “Service Charges in Commercial Property – A Guide to Good Practice” which was published in October 2000 under the auspices of leading industry bodies, and from 1 April 2007 has superseded it. (More particularly, it is stated to come into effect “for service charges commencing on 1 April 2007 or any date thereafter”.) In the meantime, the new Code of Practice has been specifically endorsed by the Code for Leasing Business Premises in England and Wales 2007.
While the Guide was voluntary, it is suggested that the new Code of Practice will have more prominence by virtue of its status as an official RICS guidance note. It has the approval of the British Property Federation, the British Retail Consortium, the British Council for Offices, the British Council of Shopping Centres and the Property Managers Association and is applicable to England and Wales only.
The guidance contained in the new Code of Practice is intended to represent best practice. Members of the RICS are not bound to follow the advice and recommendations contained in it, but the RICS warns that where allegations of professional negligence are made reference to the content of the new Code of Practice may be made. Members are also warned that departures from the new Code of Practice must be explained.
However, this must be considered against the background of a managing agent’s duties to his client, i.e. the landlord. In seeking to manage in accordance with the new Code of Practice, a managing agent may well be in breach of those duties, unless the landlord has specifically authorised him to do so. Even then, complying with the new Code of Practice may well amount to a breach of the lease terms.
The specific topics covered are:Management
Communications
Transparency
Service standards and provision
Administration
Additional shopping centre services
Copies of the new Code of Practice can be downloaded from www.rics.org.
But how effective in practical terms is the new Code of Practice likely to be? Compliance is an entirely voluntary matter. Its existence merely serves as an encouragement to landlords and tenants to negotiate and apply the terms of the lease in accordance with the recommendations the new Code of Practice sets out. Many landlords simply may not be prepared to go along with this, when possibly the only recognisable sanction is a very general one, namely the threat that the government may one day impose statutory controls.
Tenants under leases presently in place will have scant ability to persuade landlords who insist upon adhering to the letter of the lease terms to do otherwise. They are contractually bound. On lease renewal, the court’s attitude to the effect of section 35 of the Landlord and Tenant Act 1954 and the decision of the House of Lords in O’May v City of London Real Property Co Ltd [1983] 2 AC 726 present clear obstacles to enforced change in those lease terms.
(It will be remembered that in O’May the House of Lords approved four tests for ascertaining the fairness of a change in lease terms on renewal that one party seeks to persuade the court to impose on the other. They are:Has the party demanding a variation in the terms of the current tenancy shown a reason for doing so?
If the party demanding the change is successful, will the party resisting it in principle be adequately compensated by the consequential adjustment in the open market rent?
Will the proposed change materially impair the tenant’s security in carrying on his business or profession?
Taking all the relevant matters into account, is the proposal in the court’s opinion fair and reasonable between the parties?) A new letting in the market may present a better opportunity but, as with any negotiation, it is all about comparative bargaining strengths. Additionally, the terms of existing leases of other areas within the same development usually cannot be ignored.
There are, however, two particular issues for landlords to bear in mindWithout specific incorporation, the new Code of Practice obviously cannot override lease terms but landlords should be conscious that where it can be shown at the outset that it was intended that the new Code of Practice should apply, any ambiguity in the lease may well be construed in accordance with its terms. In other words, the new Code of Practice may be seen as part of the factual matrix.
There is also a risk for a landlord, at the lease negotiating stage, that some representation may be made by it or on its behalf to the effect that the landlord will comply with the new Code of Practice. Such a representation is capable of founding a claim in damages, if subsequently proven untrue. The new Code of Practice will often impose much more onerous duties on the landlord than those envisaged by the lease provisions. Subject to these two issues, as one commentator has already said “Unless the Code is supported by legislation, its contents are bark without bite. A managing agent should not follow the Code to the disadvantage of its client, the landlord, without the latter’s prior agreement. Tenants should not assume that a landlord’s failure to comply with the Code will give them any rights that they would not have enjoyed without it.”
© John Martin
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