Service Charges in the Health Sector

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Service Charges in the Health Sector

Published 4 March 2019

The RICS’ new professional statement, Service Charges in Commercial Property (1st edition), will come into effect in a month’s time on 1 April 2019 and may have important ramifications for the negotiation and management of service charges in the health sector.

The most fundamental change introduced by the new professional statement is the introduction of nine mandatory requirements which all RICS members must take into account when negotiating and managing the operation of service charges. The professional statement also contains a number of core principles with detailed guidance to support these principles. The core principles are not mandatory, but must only be departed from for justifiable reasons.

The mandatory requirements are as follows:

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

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

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

4. Owners and managers must ensure that an approved set of service charge accounts showing a true and accurate record of the actual expenditure constituting the service charge are provided annually to all tenants.

5. Owners and managers must ensure that a service charge apportionment matrix for their property is provided annually to all tenants.

6. Service charge monies (including reserve and sinking funds) must be held in one or more discrete (or virtual) bank accounts.

7. Interest earned on service charge accounts – or where separate accounts per property are not operated, a proper and reasonable amount of interest calculated on normal commercial rates – must be credited to the service charge account after appropriate deductions have been made.

8. Where acting on behalf of a tenant, practitioners must advise their clients that if a dispute exists any service charge payment withheld by the tenant should reflect only the actual sums in dispute.

9. When acting on behalf of a landlord, practitioners must advise their clients that following resolution of a dispute, any service charge that has been raised incorrectly should be adjusted to reflect the error without undue delay.

The professional statement is likely to come to play an important role in influencing the negotiation and management of service charges, as RICS members seek to avoid the risk of regulatory sanctions. It is also likely that in case of ambiguity, lease terms will be interpreted in light of the professional statement whenever possible.

The professional statement serves to regulate the operations of RICS members (and does not directly regulate the terms of leases). While any RICS member who does not follow the mandatory requirements may face legal and disciplinary consequences, a breach of these requirements would not give a tenant any right to claim against a landlord, or any right to refuse to pay service charge charges. In the case of conflict, the terms of a lease will always override the provisions of the professional statement, so the negotiation of service charge provisions will remain an issue of great importance.

It is as yet unclear how the professional statement will operate specifically in the NHS environment. The practice of charging a management fee on top of the usual service charge fees could be seen to breach the second mandatory requirement, although it remains to be seen how the RICS perceives this practice in specific context.

The new professional statement also serves as a good opportunity for NHS bodies to review their own methods of managing service charges when acting as landlord in order to assess compliance with the provisions of the statement, representing the ‘new norm’.

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