A second edition of the RICS Professional Standard has been published, which will bring the management of service charges for commercial property up to date – with potential implications for accountants providing assurance in this area.

The RICS Professional Standard sets out best practice in the management and administration of service charges in commercial property and is used extensively across the commercial property sector. It is referred to as a matter of course during disputes and regularly referred to within leases and other contracts.

The Standard refers to ICAEW Technical Release, TECH 09/14 Accountants’ reports on commercial property service charge accounts, which sets out guidance on best practice for the review of service charge accounts. TECH 09/14 is widely used in the industry and has had an extremely positive impact on the work of accountants in this area.

Chris Carle, a Partner at BDO LLP and a member of the RICS’ expert group formed to review the first edition, explains: “Some leases, particularly older ones, state that the service charge accounts should be audited by a qualified accountant. Where this is the case, those accounts should be audited under the International Standard on Auditing, ISA (UK) 800 (Revised), unless the tenants agree that an independent review can be completed instead.

“TECH 09/14 provides a best practice framework to help drive a consistent form of reporting across the industry whilst maintaining a degree of assurance on the financial information within the service charge accounts.”

Framework for consistent reporting

The purpose of the update to the Professional Standard is to improve general standards of service charges and promote best practice, uniformity, fairness and transparency in the management and administration of service charges in commercial property. It also aims to ensure that budgets and year-end certificates are issued in a timely fashion. 

Jonathan Lovejoy, Head of Commercial Surveying at British Land, says: “The existing Standard published in 2018 hadn’t quite moved with the times. This latest version brings the wording of the standard up to date – it’s more evolution than revolution.”

Clarity over service charge spend

Lovejoy says the new Professional Standard, updated by the expert group and further refined following consultation feedback from 285 respondents, aims to offer commercial tenants more clarity over what landlords are spending the service charge on. 

“Things have changed for the industry, particularly in terms of sustainability objectives. This alone needed careful consideration on the implications on both landlords and tenants and what is permissible within the parameters for good practice.”

Changes at a glance

The new RICS Professional Standard includes a mandatory requirement that the accounts must be signed off within four months of the year end, or supply an explanation to tenants as to why that hasn’t happened. 

The Standard goes into more depth on the topics of landlord forward funding and payment plans – where a landlord pays for something up front and recharges the tenants over a period of time, particularly where these are managed outside of the service charge or lease provisions.

Where a lease makes no provision for a sinking fund or reserve fund, it can be beneficial to both landlords and tenants to spread the cost of anticipated future works over several service charge periods.

“Whether future costs are funded via a sinking fund or the new cost category, ‘agreed contributions to future works’, the service charge accounts should contain sufficient disclosures to ensure full transparency, for example the nature of the works, total cost and timescales,” Carle says.

Where service charge funds have been used to settle costs that are subject to a pending insurance claim, they should be disclosed separately within the disclosure report under the heading ‘submitted and pending insurance claims’. Carle explains: “The reason for this adjustment is to ensure that users of the accounts are aware that the cost has gone through the service charge in the current year, but that the corresponding credit, assuming the claim is successful, will be received in a future period.”

Working group to update TECH 09/14

ICAEW has formed a working group to update TECH 09/14, chaired by BDO’s Carle. “We’ve gained a lot of knowledge and experience since TECH 09/14 was first published and the industry has moved on significantly. TECH 09/14 needs to be updated to reflect these changes and learnings to continue to be fully fit for purpose,” Carle says. 

As to the difference that the resulting updated technical release will likely make, Carle is confident it will further bolster assurance of service charge accounts: “Before ICAEW guidance was first published in this area, the scope of work being completed would vary drastically and each firm was issuing a different style of report. This left owners and occupiers confused about the level of assurance that they could take. 

“Since TECH 09/14 was released, which includes the adoption of an independent review carried out in accordance with the International Standard on Review Engagements (ISRE) 2400 (Revised), there’s been far more consistency. Refreshing it will drive even more consistency across the industry.”

Against a backdrop of ongoing uncertainty, moves to create greater transparency over costs can only be a good thing, Carle says. “This is about raising the bar across the commercial property sector and driving consistency and fairness from the bottom up.”