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What’s Sandy Brown got to do with the 3rd RICS Code?

Gordon Whelan from Haines Watts explains

In the 1960s and early 1970s Sandy Brown was a fine Scottish full back. A Corinthian and a hero to me. He also scored one of the most spectacular own goals ever seen on an English football ground and the vision of him buckled on the ground, with an agonised “what have I just done?” expression on his face, is still sharp.

So what has all this got to do with the 3rd RICS Code?

Let me explain. The draft 3rd RICS Code included new requirements for all sources of income and benefits to the managing agent arising from their management to be disclosed in a note to the annual service charge accounts. Similarly, connected contractors and suppliers to the managing agent were also to be disclosed in the notes to the service charge accounts. I completely agree with these proposals as they give greater transparency to leaseholders and the inclusion of this type of information in the annual service charge accounts is, in my view, entirely appropriate.

However, at the final stage of the consultation process for the 3rd Code I felt it was incumbent on me to point out that these changes, although important, would come with a price. The inclusion of the information in the notes would inevitably increase accountancy fees as the reporting accountant would now have to check the notes and at least be satisfied that the information provided was consistent with the accounts and not misleading. Furthermore, the disclosure of connected parties can also be tricky for the reporting accountant. These relationships can be complex to unravel and in an “audit” assignment, where there is a greater onus on the reporting accountant for the accounts to be materially correct, the complexity will, again, often result in higher accountancy fees.

No notes to the accounts?

I expected these observations to be got around by a form of caveat along the lines of, “unless the cost is disproportionate”. However, when the final 3rd Code was released the solution was to remove the statements entirely from the annual service charge accounts. There was a subtle change in wording for the final Code so that the declarations should be issued “with” the service charge accounts (sections 3.6 and 10.1 of the Code).

The nuclear option!

And the attack on the notes to the accounts didn’t stop there. Appendix C to the Code states that explanatory notes to the accounts are to be provided “with” the service charge accounts along with the commentary, “notes may be included with an accompanying letter. They may not always be needed…….”

There are a number of problems with the latest approach adopted by the 3rd RICS Code.

  1. The reporting accountants will now have to go to great lengths to ensure that their name is not associated with any disclosures or statements that accompany the accounts as they will not have been checked by the accountants. This has the potential to confuse lessees as to the status of any declarations made outside of the accounts and if the 3rd RICS Code is followed, lessees may now receive accounts, a letter and possibly two further statements.
  2. The onus now falls completely on the managing agent to report other income and connected suppliers. Managing agents will have to bear the full cost of making the statement and they may find it difficult to pass this cost on to lessees in their management fees. The additional statements now required will add an unnecessary administrative burden onto the managing agent.
  3. By suggesting that notes should be provided outside of the accounts, Appendix C puts the Code in direct conflict with best practice guidance for service charge accounting – TECH03/11. The Code now includes a direct reference to TECH03/11 within it and thereby gives TECH03/11 equal status as mandatory or recommended good practice. TECH03/11 clearly endorses the use of notes in the service charge accounts. Having elevated TECH03/11 by direct reference in the Code, Appendix C then clips its wings and what we are left with is a mixed message and a form of “TECH03/11 a la carte”.

A stab to the heart

However, these points, although important, are not the reason why I am left distraught by the final 3rd RICS Code. Look at the credentials of the annual service charge accounts,

  • It is an annual document
  • Usually required under the lease and
  • Signed off by two professionals; one independent of the relationship between managing agent and lessee.

I can think of no other document in property management that has these credentials and if the annual service charge accounts are prepared with skill they can be a powerful communication tool between agent and lessee. The accounts have the potential to add value to the relationship between lessee and managing agent and given this, why would you not include important information within the accounts?

In its current format, the 3rd RICS Code misses this value. It sees the annual service charge accounts as nothing more than a cost and a burden on lessees that should be minimised. This is my real problem with the Code as it goes against the very core of what we believe at Haines Watts. My well intentioned intervention has ended up being a self inflicted stab to the heart and my Sandy Brown moment!

And what of the great Sandy Brown? Well, he had the last laugh! In the season of his spectacular own goal his team finished as Champions and so in the end, in the final analysis, his moment of madness didn’t really matter!

For advice, information or simply a quick chat about your service charge needs, please get in touch using our contact form

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Haines Watts Luton
42 High Street
Flitwick
Bedfordshire
MK45 1DU

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130 Bournemouth Road
Eastleigh
Hampshire
SO53 3AL

Tel: 02380 276323