The second edition of the RICS Service Charge Code, 'Service charges in commercial property', became effective from 31 December 2025. Whilst not legally binding, the code is a significant piece of guidance for landlords and tenants of commercial property. In this article we explore the how the past few years have shaped the commercial service charge regime and how the key themes of the code could impact both landlords and tenants.
The Covid-19 pandemic had a severe impact on the commercial service charge landscape. Despite low building occupancy and usage, landlords were required to maintain essential services such as air conditioning and security and with increased energy costs, service charges remained increasingly and disproportionately high. Commercial tenants experienced severe cashflow problems which frequently led to major shortfalls in service charge recovery whilst emergency legislation limited landlords’ ability to recover the resulting arrears.
When business life returned to the 'new normal' and commercial occupiers starting to return to buildings, landlords resumed delayed projects and maintenance works. The inflated construction costs, increased labour and energy costs, and beleaguered supply chains meant that the cost of these works and supplying services generally increased significantly. Landlords had no option but to levy significant service charge increases to cover these costs plus the additional expenditure of meeting new ESG standards.
The upshot of all this is that we are seeing more and more commercial tenants scrutinising and, whenever possible, seeking to challenge these increased service charges. In the Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd case, the Supreme Court established a 'pay now, argue later' framework for challenging service charges which essentially confirmed that whilst tenants have the ability in certain circumstances to challenge certified sums, they cannot withhold payment in the interim. This helps ensure the landlord’s cashflow is maintained, and therefore that funds are in place to ensure services are provided and not interrupted for all tenants. This case highlighted the need for the reinforcement of industry standards relating to commercial service charge management and so the RICS Service Charge Code was conceived.
The purpose of the RICS Service Charge Code is to strengthen industry standards around fairness, transparency, consistency and dispute resolution in commercial service charge management. The key themes are:
Whilst the RICS Service Charge Code is not yet legally enforceable, it's widely accepted, applied and invariably recognised as being good practice. Courts will therefore be very mindful of its requirements and look dimly on any non-compliance.
Our advice to landlords is two-fold:
Landlords need to recognise when works could be an improvement and fall outside of the contractual service charge machinery. They need to hold service charge monies in a separate account and ensure that any insurances commission and rebates are fully disclosed to their tenants and not retained for the landlord’s own benefit.
Crucially landlords need to understand that percentage based management fees are now prohibited by the code and must be fixed annually. They also need to be cognisant of the new timelines.
It's important that tenants understand that the default position for challenging service charges is 'pay now, argue later' as endorsed by the Supreme Court in the Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd case. Failure to follow this reasoning could see a tenant ending up with a contractual liability for interest and also costs.
One of the key themes of the RICS Service Charge Code is alternative dispute resolution, with a robust recommendation that it be included in leases and used proactively. Litigation should always be a matter of last resort and tenants, as well as landlords, are urged to seek advice from service charge specialists to ensure that any decisions they make with regards to disputing charges are in line with the provisions of their lease agreement and the code.
Other considerations for tenants are:
The service charge is a perennial issue for both landlords and tenants and for the duration of the lease so can often be the most important facet of their relationship.
First and foremost, the parties need to have their eyes wide open when they take on a lease, avoid boilerplate clauses where these are unsuitable for the property in question, and ensure that contractual service charge provisions are fit for purpose in terms of the construct and age of the building and the plant and equipment it relies on.
Contractual service charge provisions are often lengthy and unwieldy but both parties need to understand the full detail of what they have agreed, how the service charge provisions might bite and be an issue during the term of the lease. Full surveys and disclosure before the lease is entered into is essential because excessive and unwelcome service charge issues each and every year of a five to 10 year lease are distracting, costly and ultimately damaging to the landlord and tenant relationship.
For further information, please contact our property disputes team.
We produce a range of insights and publications to help keep our clients up-to-date with legal and sector developments.
Sign up
