Alistair Drummond: Avoid costly errors in service charges

Whilst we struggle our way from the North Bridge down to Leith Walk, the Edinburgh St James is taking shape behind the construction hoardings. This promises to be, at least according to the advertising blurb, one of the capital's prime retail destination including 85 retail units covering 850,000 sq ft. In short, another very large shopping centre.

An artists impression of the Edinburgh St James showing the galleria roof and upper levels

Whilst enjoying all the facilities modern shopping centres have to offer, very few consider who is responsible for the maintenance of the entrances, malls, escalators and other common areas of the centre. Such matters are invariably regulated by the service charge, administered by the landlord (or usually, a surveyor on their behalf) and paid for by the retail tenants, each with differing proportions to pay based on respective leases.

These payments can be substantial, especially when refurbishment works are underway, often including mechanical and electrical works. Consequently, service charge payments have found themselves to be fertile ground for disagreement and legal disputes.

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In 2007 the Royal Institution of Chartered Surveyors (RICS) introduced the Service Charge Code for Commercial Property, with the intention of introducing guidance to surveyors to promote best practice and avoidance and resolution of disputes. In late 2017 it issued a draft of the 4th edition of the code and, in early 2018, completed a process of consultation with the profession. The 4th edition is expected to be published soon and it is thought to include some dramatic changes.

Alistair Drummond, DLA Piper's head of Litigation and Regulatory Scotland practice,

Perhaps one of the more important proposed changes is the change to the status of the code itself. Until the 3rd edition, the code was issued as a formal “code of practice” which under RICS governance meant that the terms of the code are not themselves mandatory, but merely recommendations.

The 4th edition is to be issued as a “RICS professional statement”, an elevation that will probably amount to negligence or unprofessional conduct for surveyors to act contrary to its terms.

As currently drafted, the statement includes eight new mandatory core principles. Some of these include:

Owners and managers must seek to recover no more than 100 per cent of the proper and actual costs of the provision or supply of the services.

Owners and managers must ensure that service charge budgets, including appropriate explanatory commentary, are issued annually to all tenants.

Any service charge monies, which will include reserve and sinking funds, must be held in one or more discrete or virtual bank accounts.

Where acting on behalf of a tenant, RICS members must advise clients that, if there is a dispute, any service charge payment withheld by the tenant should reflect only the actual sums in dispute.

All expenditure that the owner and manager seek to recover must be in accordance with the terms of the lease.

The stated aims and objectives of these core principles is to promote best practice, timely issue of budgets, communication and the avoidance of disputes.

Notwithstanding the terms of the code, the imposition and recovery of the service charge is a matter of contract (the lease) between owner (landlord) and retailer (tenant). As a matter of law the terms of the contract require to be adhered to and the core principles reflect this, the terms of the code cannot usurp or take precedence over the terms of the lease.

Therefore it is vitally important not only that the service charge provisions are administered correctly during the lease term but also, perhaps more importantly, that care and consideration is taken when drafting the service charge provisions when any centre is constructed. Errors made in the drafting stage can all too easily lead to high value disputes and significant losses over the period of the leases – which for larger, anchor tenants can run for 25 years or more.

So the next time you are in one of Scotland’s many shopping centres, have a look around and consider the condition of the common areas, the roof, the entrances, escalators etc and ask yourself who pays to keep it all sparkling clean?

Alistair Drummond, DLA Piper’s head of litigation and regulatory Scotland practice, presents on the service charge code professional statement at the RICS CPD Foundation lectures in Edinburgh and Glasgow in December