A Bellrock Group Company

Commercial Service Charge Industry Update

05 Aug 2014

Property Solutions stays on top of industry developments, and these are a couple of publications that we believe landlords, occupiers, and managing agents should be aware of.

RICS Code of Practice – Service Charges in Commercial Property, 3d Edition

Where to find:

Issued: January 2014

Important points:

– The new edition recommends that the annual Accountant’s Report which forms part of the year-end reconciliation pack for many commercial properties provided to tenants should include a statement as to whether the accounts are prepared on an accruals basis (method recommended by best practice) or cash basis.

– The Code also provides a definition of accruals as well as clarifies what they are not. It further recommends that a schedule of accruals included in the service charge expenditure should be provided. Where invoices are not received in respect of an accrual brought forward from the previous year, the accrual should be credited back to the service charge unless there is a realistic expectation that an invoice will be received in the future.
ICAEW Technical Release on Commercial Service Charge Accounts

Where to find:

Issued: April 2014

Important points:

– The Technical Release reinforces the need for better disclosure of service charge information and clarifies the role of the accountant and managing agent and the scope and limitations of the Accountants Report accompanying the annual accounts.

– It describes procedures that may be performed to address all material items in the annual statement of service charge expenditure, including disclosures and describes which areas in the annual statement of the annual statement of service charge expenditure are likely to contain material misstatements.

– The Technical Release also mentions that in performing the review, it may be necessary for the reporting accountant to use work performed by other practitioners, or the work of an individual or organisation possessing expertise in a field other than accounting or assurance. The accountant must report issues that require adjustment to the annual statement even if those issues come to light subsequent to the year in question. If the accountant is working on certifying the annual statement and realises that an accrual was overstated in the light of an invoice that has come in during the time of the accountant’s investigations, they are to “request management to correct those statements”.

– The accountant is bound to “modify” their conclusion and the words “materially misstated” are used. The Technical Release proceeds to explain this more fully and in the Basis for Adverse Conclusion indicates that this is specifically applicable to “substantial accruals in the sum of £x [that] have been made for costs that do not appear to have been incurred during the year.” This is very important as the responsibility for making sure that any accruals in the annual statement are only those that have been “incurred during the year” falls on the managing party.

Model Commercial Lease

Where to find:

Issued: 2014

Important points:

– The Model Commercial Lease contains an important clause allowing the tenant “to inspect evidence of the Service Costs at the Landlord’s head office or any other location the Landlord specifies” within four month upon receipt of the service charge certificate of expenditure.

– As to other elements of service charge management it requires the landlord to comply with the RICS Code of Practice – Commercial Service Charges 3rd Edition.

“[Landlord] must take into consideration the administrative, accounting, procurement, management and operational provisions of the Service Charge Code for so long as it is in effect insofar as it is

(a) reasonably practicable to do so;

(b) consistent with the Landlord’s obligations under this Lease; and
(c) consistent with the economic and efficient management of the Building (taking into consideration all the circumstances incl uding the terms of the leases of other Lettable Units)”

With any queries please contact Anastasia Sandstrom, Business Development and Research Manager:

E: anastasia.sandstrom@property-solutions.co.uk

M: 07730 131620