Have your say on the service charge code

Service charges in residential properties have become a topic of public interest precisely as the government seeks to overhaul leasehold legislation in England. Reflecting this, the RICS is making some key updates to the draft fourth edition of the service charge code, which is now out for public consultation. What is the code? The RICS service charge residential management code is a code of practice aimed at landlords and managing agents appointed to undertake management functions of any long leasehold or other residential property in England where a tenant is required to pay a variable service charge. Why is the RICS changing it now? The code was first published in 1997, and its evolution since then has reflected changes in legislation and ever-increasing complexities associated with the management of residential leasehold properties over the past 25 years.  It is now time for an update, given events of the past six years since the current third edition was published. RICS brought together an expert working group of leasehold property experts in 2021 to review the code.  What are the key updates? Registered providers of social housing which include housing associations and local authority housing providers have previously been excluded from the code, but will fall within the scope of the next edition under current proposals. This is because of the increasing number of properties owned and managed by registered providers including shared ownership properties.  Structure Significant updates have been made to improve readability, including a restructure of the sections and the merging of a number of introductory sections into a user-friendly single introduction. The definition of “you” has also been updated to reflect relevant persons, as defined in section 87 of the Leasehold Reform, Housing and Urban Development Act 1993, to make it absolutely clear the code applies to landlords as well as managing agents. This is an important point, given landlords are responsible for fulfilling a wide range of legislative requirements which are defined by legislation and highlighted by the service charge code.  Planned preventative maintenance The use of planned preventative maintenance, or PPM, plans is not a new concept to the code, albeit the term PPM is used with the aim of creating consistency in the industry and reflecting the RICS guidance note Planned Preventative Maintenance of Commercial and Residential Property as the benchmark guidance for RICS members undertaking PPM plans. The current edition of the code recommends the use of PPM plans, which are referred to as costed long-term maintenance plans. Proposals in the fourth edition state that all buildings should have a costed PPM plan that reflects the age and condition of the building.  The PPM plan can and should be used as a reliable basis for reserve fund contributions to ensure that landlords and agents are planning ahead for major works and making provisions for the cost of the works via reserve funds, where permitted by the lease. Keeping leaseholders informed is critical given that they will be contributing to the cost of the anticipated works. Therefore, PPM plans and projected levels of reserve fund contributions should be made available to leaseholders on request and to any prospective purchasers on assignment. Industry standard cost classifications Appendix A of the draft code sets out standard cost classifications which are consistent with the RICS professional statement Service charges in commercial property (1st edition). This new addition to the residential code is intended to aid transparency and facilitate better cost comparisons and benchmarking between properties. Consistency between commercial and residential management will also help with the increasing prevalence of mixed-use developments.  Accounts explanatory notes On a similar theme, enhanced requirements state that managers should provide leaseholders with explanatory notes to accompany the annual expenditure statement to explain variances between budget and actual expenditure. Not only will this provide transparency for leaseholders, but it will also assist landlords and agents by providing upfront information rather than on-demand as required, thus streamlining the process.  Commissions To reflect the expanded definition of “you” to include landlords and agents, the commissions section has been updated to capture landlords. The impact is that landlords, as well as agents, will need to notify leaseholders annually of any commissions, remuneration or other benefits received as a result of placing insurance, procurement of services or utilities.  Additional proposals state that such income should be offset against service charges unless the landlord or agent can demonstrate that the remuneration is in return for a proportionate service. This is to ensure that there is a benefit to leaseholders of landlords and agents receiving commissions, rather than it just being additional income.  An example being that, if a landlord receives a commission from an insurer for placing insurance with no benefit to leaseholders, this would not be considered appropriate under new proposals and therefore the commission should be used to offset the service charge costs. Who should respond and by when?  The consultation is open until 16 May, and we are keen to get as much feedback from anyone who is affected by the code as possible – whether that’s landlords, leaseholders managing agents or registered providers. Download the code and respond to the consultation at https://consultations.rics.org/servicechargecode4thedition Antony Parkinson MRICS is a senior specialist in the property standards team at RICS and chair of the RICS service charge residential management code expert working group Image © Scully/imageBROKER/Shutterstock