RICS SERVICE CHARGE RESIDENTIAL CODE 3 RD EDITION – WHAT’S THE DIFFERENCE?

The new Residential Code of Management by RICS has now been officially released.
The code has been in consultation for a number of years and required updating to take
into account the number of changes within the industry in recent years.

The question is, what are the main changes and will they help and improve the level of
service from Managing Agents in the industry.

The new code is a lot more in depth in regard to its explanation of the code and is more
comprehensive in its detail which provides a step by step guide on how to manage
residential blocks.

In this article I will summarise the main differences between this edition and the
previous one.

Ethics

For the first time RICS has outlined what it perceives as the ethics by which all
Managing Agents and Managers should abide by.

Given that MIRPM qualified individuals are now able to apply to become an AssocRICS
with a short ethics test online, it is prudent for RICS to include this within the code. It
provides the industry with the RICS ethos which will enable them to help raise the
standard of management whilst protecting the brand.

In my opinion this is the most important inclusion in the new code. It is a set of
requirements which all agents should hold themselves too. There is no doubt the
majority of agents already do achieve this standard, but by having RICS clearly setting
it out it forces all agents to raise the standard of management and service provided to
lessee’s and landlords.

Part 3 Appointment of Managing Agent: Securing Instructions

In the introduction to this section the new code has stated one thing which is a clear
directive to all agents. “Prior to accepting an instruction (commencing work), you should
clarify for whom you will be working and how you will be paid, thereby spelling out
unequivocally whose interests you will be representing” (3.1)

The key part of this statement is how the agent will be paid. There are still
circumstances whereby the landlord/freeholder which is not the lessee’s, instruct the
agent, but it is the service charges which covers the fee.

It feels like RICS is trying to remind agents of this, so when the landlord provides
instructions which are not in the best interest of the lessee’s the agent should be aware
of who they are representing.

This of course is never easy and in some cases can cause the agent to lose the
management, but of course there is a balance between the loss of management and

loss of reputation.
Point 3.6 Other Income of the code now requires managers to declare in the annual
service charge accounts any insurance commission or other sources of income arising
from the management contract. This requirement is then repeated in “Part 12
Insurance”
point 12.1 Introduction specifically in relation to insurance.

The new requirement goes considerably further than ARMA Q, which only requires
commissions taken to be declared but does not specify for the amount or how it is to be
declared.

The Code implies, but does not explicitly state, any such commission is to be agreed in
advance with the client or landlord.

However it is silent on the common situations of a non-managing landlord who is
taking commission but is not declaring it or where an agent arranges insurance
through a sister company. So even though the code has gone some way to improve
transparency on the subject of commissions, some lessee’s will still be in the dark due
to this.

For the code to really strengthen the issue of transparency the declaration of
commission should be apply to all landlords regardless how the insurance is placed.

Part 6 Accounting For Other People’s Money [Client Money]

The old code required records to be kept for 6 years. Now under 6.3 Records the new
code requires for records to be kept for 12 years.

Given we are in an age where it is more possible than ever to go paperless this should
not be a challenge for the majority of agents. However it does open up the possibility
of much more complex and lengthy Tribunals.

If records are required to be kept for 12 years then there is a potential for all 12 years
worth of records to be reviewed.

This aside by lengthening the period for which records need to be kept provides
lessee’s more ammunition in ensuring the landlord and their respective agents manage
the block to the benefit of the lessee’s.

Under 6.6 Handover of Documentation, the new code makes it clear all documents held
by the agent are under the ownership of the client. The new code is making it clear
agents are just the custodians of this information, such as leases, leaseholders files,
contracts etc.

The new code does allow for copies of this information to be retained by the agent and
given the litigious society we are now living in, it would be prudent for all agents to
take advantage of this. This way if a claim is levied after handover the agent would be
in a stronger positon to protect itself.

4There has also been a new requirement inserted in 6.7 Accounting for Client Monies and
Service Charge Funds upon termination.
Each agent has different views on this and
different practices, but now it seems RICS is looking to ensure the agents express this
clearly to the client.

It states “Your contract should make clear provision for how and when client monies and
uncommitted service charge monies are calculated and handed over to your client or the
appointed agent”

This is a sensible approach as it clearly defines to the client exactly what will happen
upon termination and also sets a standard for the agent to abide by and therefore
avoids any dispute between the client and incoming agent

Part 7 Service charges, ground rent and administration charges

The new code distinguishes service charge bank accounts as a special form of client
account. It still allows agents to hold separate bank accounts for each scheme or to
pool service charge monies in what the code calls a ‘universal’ account.

The previous code required client accounts to be in the name of the manager/agent
and include the words “client account” in the title.

However under Point 7.6 Holding Service Charge Funds in Trust the code now states
“The accounts should include the name of the  client or the property (or both) within the
title of the account.”

It also states in the definitions section on page 12 “All client money that is service charge
money should therefore be held in a separate bank account that includes words in its title
to clearly indicate that it is -‘client money’.”

When it comes to the financial management of service charge monies, some agents are
better than others. As the monies are very personal to lessee’s as it is their money
going into the account, this new requirement will only go to strengthen the way monies
are handled by agents giving lessee’s more comfort.

Further to this it will also allow agents to more efficiently audit the accounts especially
if they have a landlord with multiple blocks under management by the same agent.
 
Further changes are under 7.10 Accounting for Service Charges. Unless the lease
requires otherwise the new code recommends agents follow the Technical Release on
service charge accounting issued by the Institute of Chartered Accountants for
England Wales which is TECH 03/11.

So we now have the added strength of the code of practice that all accounts should
include a balance sheet/balancing statement. The new code also recommends that
explanatory notes accompany the accounts.

 The old code recommended an audit unless the lease did not allow recovery of the
cost. The new code now recommends to follow the Technical Release which explains
an audit is not the default option-rather to report on factual findings which has
become the norm unless the lease specifically refers to audit.

The new code also states the annual service charge accounts should be issued
following the end of the financial year under the same paragraph of 7.10.

Part 10 Contractors and Suppliers

The issue of agents using related companies as contractors for services and repairs is
dealt with in 10.1 Introduction in the new code where it states:

“Where you have a connection with any proposed company, individual, contractor or
supplier, whether financial or otherwise, this should be declared to your client and the
leaseholders as a note in the year end service charge accounts.”

It would be helpful here for agents to cross reference to paragraph 3.6 which requires
the amount of any sources of income to be declared as a note in the annual service
charge accounts. One could perhaps assume that the link is implicit.

All in all, the new code has been strengthened in areas mainly focusing on the financial
side of the management. The introduction of the Ethics at the start is a valuable
addition to the code and holds the industry to unequivocal and uniform standard which
all agents should strive to achieve if not already doing so.

However, with the ever evolving property sector there is still a lot which needs to be
addressed which will need to be encompassed in future editions, such as District
Heating Systems which will become more common place in new developments.  

Notwithstanding this the new code is without doubt a vast improvement on the
previous edition and is long overdue. It is hoped the next edition will not take so long
ensuring the code keeps up to date with ongoing changes.

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