Since 1996, where a UK commercial lease failed to include specific provisions outlining the financial reporting, management, administrative, and audit processes for managing the service charge process, the practical “best practice” guidance came from a non-mandatory “voluntary” RICS Code of Practice, Service Charges in Commercial Property (RICS, 2014). However, in 2018, the RICS published a Professional Statement, Service Charges in Commercial Property (RICS, 2018), that introduced an array of mandatory and best practice requirements for service charge managers to adopt and comply with. The Professional Statement was effective for service charge years commencing on or after 1 April 2019, so RICS Members and regulated firms should now be producing and publishing accounting documents that comply with its requirements.
From the perspective of an RICS member, failure to comply with the mandatory obligations of the Professional Statement may result in “legal and/or disciplinary consequences…[and] may lead to a finding of negligence against a surveyor (RICS, 2018, Section 1.1 p. 7)”. In contrast, departure from the statement’s “best practice” requirements may be permitted “for justifiable reasons” (RICS, 2018, Section 1, p.7). In addition, the requirements of the professional statement cannot override the legal requirements of the lease, but when interpreted in conjunction with it, can help to identify the best way to provide services in accordance with the lease.
When interpreting the RICS Professional Statement it is important to distinguish between its “must” and “should” requirements, which are classified as the “mandatory” and “best practice” provisions, respectively. However, due to the way the professional statement is written and structured, it can be difficult to clearly identify what is “mandatory” rather than “best practice”, since some requirements are discussed then reintroduced using different wording, and some information to be disclosed is neither described as either a “must” or a “should”. While the issue of language is potentially problematic and deserves further investigation, the more important research question posed here is:
Are managing parties producing service charge accounting documents that comply with the new presentation and disclosure requirements of the RICS Professional Statement?
Based upon a review of 20 recently published annual statements of service charge expenditure provided to Bellrock Property and Facilities Management Ltd (Bellrock), this briefing paper provides some initial thoughts and observations as to whether annual service charge accounting statements for UK multi-let office buildings comply with select requirements of the 2018 RICS Professional Statement, Service Charges in Commercial Property (RICS, 2018).
Assessing compliance with the 2018 Professional Statement: the Metrics
After evaluating the Professional Statement, the researchers identified a series of 17 “must”, “should” and “other” compliance metrics that both captured the main accounting and administrative requirements of the Professional Statement and could be identified via an unbiased, “binary” review (i.e. “yes” it is included, or “no” it is absent manner) of the content within the annual service charge accounts. As the leases for many properties do not require the creation of a sinking or reserve fund, no metrics were included to measure the accounting requirements in this area. Each of the 17 metrics are explained in more detail in Table 1.
The metrics include four “musts”, 12 “shoulds”, and one “other” requirement as per the language used within the Professional Statement. As the one “other” requirement included within the Professional Statement (“Openness and transparency can be further enhanced by the inclusion of a balance sheet or cash reconciliation”) is neither a must or a should, each property’s annual service charge accounts are ranked out of a total compliance score of 16 (i.e. the four “musts” and 12 “should”), with separate reporting of compliance with the one “other” requirement.
Methodology and Findings
The accounting certificates analysed were selected randomly from the data available to Bellrock, and included documents prepared by a range of managing parties. The overall compliance results for the 20 UK multi-let office properties are illustrated in Figure 1.
While it is difficult to generalize from such a small sample, it is clear that compliance varies widely. Only two documents fully complied with all 16 requirements. Nine documents complied with at least 12 of the 16 requirements, and eight others complied with five or fewer metrics. Overall, compliance levels appear similar to those found with the previous RICS Code, with some managing parties trying hard to comply, while others have much work to do.
When assessing the results in Table 2, it is disappointing to note that there was less than 60% compliance for any of the four mandatory “must” requirements (Metrics 1-4 in Table 2). In addition, the failure to comply with certain of the 16 requirements, such as “Statement that accrual accounting used” (Metric 8), and the requirements to certify that the accounts represent actual expenditure incurred in supplying services in accordance with the lease (Metrics 13 and 14), are more critical for determining whether the accounts provide “true and fair” and useful information for occupiers. The results for these metrics are especially disappointing, since they are required in order to enhance the comparability and quality of the resultant accounting information. Furthermore, many of the other accounting requirements, such as providing the financial statements within four months of the year end (Metric 5) and utilizing industry specific cost classes and categories (Metrics 6 and 7), should not be too onerous for professional managing parties to comply with.
In terms of the 17th metric, the inclusion of a balance sheet, no document included such an accounting statement, which is extremely disappointing as a balance sheet provides transparency as to the magnitude of end-of-period assets, liabilities, and reserves. In addition, the provision of a balance sheet will benefit the auditing process and assist greatly during the handover of the service charge accounts to a
In summary, these preliminary results suggest that some managing parties are failing to universally adopt all aspects of the RICS Professional Statement, and that the RICS itself needs to do more to foster the take up of both the mandatory and “best practice” requirements of its new regulation. The results also highlight the value of ongoing compliance monitoring for all industry parties, as the data clearly identified where current annual service charge accounts must be improved.
Implications and Future Research
The analysis of compliance with the service charge requirements of the 2018 RICS Professional Statements will be continued in the forthcoming SCOR for Offices 2021, and SCOR for Shopping Centres 2021. These publications will include a larger compliance dataset, which will further highlight the issues facing the UK service charge industry and the areas the RICS needs to provide support on.
Dr. Andrew Holt
Professor of Accounting
Metropolitan State University of Denver
Business Development Director – Property
Bellrock Property & Facilities Management