How is the service charge code changing?

RICS is consulting on proposed revisions  to the Service charge residential management code, which reflect the way residential leasehold block management is evolving. 

Gone are the days when block managers could focus on ensuring that the internal common parts are clean and safe, bin stores are tidy, and accessible and communal satellite systems are fully operational – some of the frequent causes of resident complaints ten years ago. 

Managers are now reporting ever-increasing workloads and an even wider range of responsibilities. Managing agents have always had a wide range of duties, but also now have to consider safety-critical issues among other requirements. Tasks such as arranging cladding assessments, increasingly intrusive fire risk assessments and, of course, resultant works to resolve compartmentation breaches are now commonplace, not to mention a fundamental part of the role.

Leaseholders also have much higher expectations, not least the right to expect that their homes are safe. Safety includes the elements over which they have no direct control, such as compartmentation and external facades.

Meanwhile, the pressure of increasing workloads and a strong job market have also resulted in experienced and knowledgeable block managers switching careers in favour of less demanding roles. 

With the current, third edition of the Service charge residential management code now six years old, RICS established an expert working group (EWG) of leasehold professionals – including landlords, managing agents, lawyers and the judiciary – to review the document. 

The EWG considered the current edition and identified where updates and other changes might be made. These proposals were evaluated, and many were incorporated into a revised draft. Updates include reordered sections and additions to the glossary. Importantly, the definition of 'you' has also been revised: this is a term used throughout the code and in previous editions has been focused on agents acting on behalf of landlords.

The updated definition clarifies that 'you' signifies all landlords, regardless of whether they have appointed an agent. This is critical, because it is landlords who bear the most responsibility for ensuring their buildings comply with the legislation to which the code refers.

In relation to the demanding of service charges, proposals set out in the draft fourth edition include the implementation of Standard Industry Cost Classifications to reflect the commercial code. This is key for consistency because aligning the residential and commercial codes will help surveyors and property managers who manage both property types, including mixed-use developments that include commercial and residential units.

It also introduces the use of preventative maintenance plans to inform anticipated expenditure and resultant reserve fund collection. Apportionment schedules will be introduced as well, to show leaseholders the basis and rationale for the service charges they pay.

There is also a new introduction to the document, advising landlords and agents to pay particular attention to ensuring that service charge budgets on new developments reflect future costs. Developers commonly market new-build apartments with a quoted service charge, but this may in fact reflect figures with limited basis or rationale that are being quoted for competing developments. 

As a result, service charge hikes in the second year of leases are possible and, in some cases, highly probable, which is clearly unfair for leaseholders. So managing agents must ensure they are satisfied that the initial service charge budget reflects steady-state costs, with any deviations, unknowns or anticipated uplifts being communicated to leaseholders before purchase. 

Landlords or their agents are also required to provide explanatory notes to leaseholders, to outline any variances between budget and actual expenditure. This is crucial. While many agents already provide such notes, by no means all of them do. The result is that leaseholders send multiple emails requesting clarification. Providing clear explanations upfront goes a long way to alleviate tensions and reduce time-consuming communications between leaseholders and agents.

Leaseholders almost always foot the bill for communal costs but may have little say in how things are done. While the code cannot change this, transparency will go a long way in ensuring that leaseholders are well informed before purchasing a property, and throughout their ownership.

Silver bullet or not, transparency must be integrated into the way we manage leasehold property. Commonhold will undoubtably become increasingly common as a tenure, but leasehold is likely to be here to stay for many. We must therefore embrace opportunities to make a significant difference for millions of leaseholders.