How Should Service Charges Be Handled?
Service charges in commercial property are one of the most common sources of tension between landlords and tenants. If handled poorly, they lead to disputes, loss of trust, and even litigation.
If managed transparently and in line with professional standards, however, service charges can underpin a strong landlord–tenant relationship while ensuring that properties are maintained effectively.
With the Royal Institution of Chartered Surveyors (RICS) introducing its “Service charges in commercial property, 2nd edition” effective from 31 December 2025, landlords and property managers in the UK must adapt to the mandatory requirements set out in the professional statement.
This article explores how service charges should be handled, why transparency is key, and how to align with the RICS standards.
Understanding Service Charges
Service charges are sums charged by landlords to tenants to cover the costs of maintaining, repairing, insuring, and managing the standard parts of a building or estate.
These charges are in addition to rent and are typically payable under the terms of the lease.
For example, a multi-let office block will require cleaning of shared areas, security, building insurance, and repairs to the structure. These costs are recovered from tenants proportionately through service charges.
Because these charges are variable and not fixed like rent, disputes often arise when tenants feel they are paying for items that do not benefit them, or where costs appear excessive or poorly explained. This is why clear rules and professional conduct are critical.
The RICS Professional Statement
The RICS “Service charges in commercial property” (2nd edition) introduces a set of mandatory and best practice principles for all RICS members. From 31 December 2025, these obligations become binding.
The key mandatory requirements include:
- Timely Certification: Service charge accounts must be issued promptly after year-end.
- Reasonableness: Charges must be reasonable and reflect the actual cost of services provided.
- No Profit: Service charges must not be used to generate profit for landlords or managers.
- Transparency: Landlords must provide clear budgets, statements, and reconciliations.
- Exclusions: Certain costs (e.g., capital improvements, initial development costs) should not be passed to tenants unless expressly agreed.
By embedding these requirements, the RICS aims to reduce disputes and bring consistency across the industry.
Using Transparent Budgets
A transparent budget is the foundation of a fair service charge regime. Landlords should issue annual budgets at the start of each service charge year. This budget must set out:
- Estimated costs of each service (e.g., cleaning, repairs, insurance, management fees).
- The method of apportionment between tenants (e.g., floor area percentage).
- Any planned major works or anticipated increases.
When tenants can see a line-by-line breakdown, it builds trust and helps them plan cash flow. It also reduces the risk of tenants disputing demands mid-year because the expected expenditure was flagged in advance.
The Role of Exclusions
Not every cost incurred by a landlord should be recoverable through service charges. Common exclusions include:
- Initial development costs of a building.
- Expenses relating to the landlord’s financing arrangements.
- Costs of letting void units.
- Capital works (unless they reduce future operating costs or are specifically permitted under the lease).
Setting out these exclusions clearly in the lease reduces the scope for argument.
It also ensures compliance with the RICS professional statement, which explicitly prohibits landlords from charging tenants for items that should properly be the landlord’s responsibility.
End-of-Year Statements and Certification
At the close of each service charge year, landlords must produce a reconciled statement of actual expenditure, certified by an independent accountant or surveyor where appropriate.
This statement compares the budgeted costs against the actual costs incurred. Tenants either receive a credit (if they overpaid) or an additional invoice (if actual costs exceeded the estimate).
The RICS requires that such statements be issued promptly, avoiding delays that leave tenants uncertain or facing unexpected demands long after the year has closed.
The certification process reassures tenants that figures are accurate and not inflated.
Aligning Leases with RICS Standards
Many older leases contain outdated or vague service charge provisions. As the RICS professional statement introduces mandatory requirements, landlords should review their leases and, where possible, align drafting with the new standards.
This may involve:
- Updating definitions of service charge items.
- Clarifying the apportionment method.
- Stating expressly which costs are excluded.
- Allowing for compliance with industry guidance.
By aligning lease terms with the RICS standards, landlords avoid drafting inconsistencies that lead to disputes and ensure they remain compliant with professional obligations.
Practical Tips for Landlords and Managers
Maintain Clear Records
Keep invoices, contracts, and evidence of expenditure. Tenants are entitled to reasonable inspection rights.
Communicate with Tenants
Hold annual service charge meetings to explain budgets and reconciliations. Transparency fosters cooperation.
Benchmark Costs
Ensure that charges are in line with market rates. Excessive or unusual costs should be justified.
Avoid “Hidden” Profits
Landlords cannot profit from service charges, for example, by charging undisclosed commissions on insurance.
Plan for Major Works
Where significant works are anticipated, consider setting aside funds to spread costs fairly over time.
Dispute Resolution
Where disputes arise, early engagement and reference to the RICS Code can often resolve issues without litigation.
Why Transparency Matters
Transparency is not only a compliance requirement; it is also a commercial necessity. In a competitive market, landlords who manage service charges fairly are more likely to attract and retain tenants.
Unreasonable or opaque charging practices damage reputation and may even affect the investment value of the building.
Moreover, with ESG and sustainability considerations increasingly important, tenants are demanding clarity on energy, water, and waste management costs. Transparent service charge reporting supports environmental responsibility and corporate governance standards.
Service Charges and Dispute Avoidance
Disputes typically arise where service charges are:
- Poorly explained.
- Higher than expected.
- Include questionable items.
- Certified late.
The RICS professional statement aims to minimise these disputes by setting out mandatory principles. Where disputes still arise, early negotiation and professional mediation are preferable to court proceedings.
Looking Ahead: December 2025 and Beyond
From 31 December 2025, compliance with the RICS Service Charges in Commercial Property (2nd edition) is mandatory for all RICS members.
This will raise the standard of practice across the market, requiring landlords, managing agents, and surveyors to embed the principles of fairness, transparency, and accountability.
Those who fail to comply risk not only disputes with tenants but also professional disciplinary action. For landlords, aligning with the standards is therefore not optional but essential.
FAQs
What is included in a typical service charge?
It usually covers cleaning, maintenance, insurance, repairs, security, landscaping, and management fees relating to common areas.
Can landlords make a profit on service charges?
No. The RICS professional statement prohibits landlords from profiting. Charges must reflect actual costs incurred.
How often should service charge accounts be issued?
Budgets should be provided annually at the start of the service charge year, and reconciled statements should be issued promptly after year-end.
What if my lease conflicts with the RICS standards?
Lease terms remain binding, but landlords and managers should seek to interpret them consistently with RICS obligations and consider updating leases on renewal.
What if tenants dispute the charges?
Early dialogue is key. Tenants may request an inspection of records. If unresolved, disputes can be referred to mediation, arbitration, or the courts.
Conclusion
Service charges are a critical aspect of commercial property management. When handled transparently, with clear budgets, exclusions, and reconciled statements, they ensure buildings are maintained to a high standard without unfairly burdening tenants.
The upcoming RICS Service Charges in Commercial Property (2nd edition) introduces mandatory requirements from 31 December 2025 that will transform industry practice. Landlords and property managers must align their leases, management processes, and reporting with these standards.
By adopting transparency, fairness, and accountability, landlords not only comply with professional obligations but also strengthen tenant relationships and protect long-term property value.
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