Solicitor Ed Williams, in our Commercial Property team, explains.
A service charge is a mechanism contained in a lease that allows the landlord to recover from the tenants the costs of services it provides. A landlord can provide many different services such as maintaining any common areas within a building, keeping accessways to the property in good repair and cleaning.
Service charges are important to consider whether you are a landlord or a tenant. This is particularly the case for commercial premises because the statutory protections for tenants are far more limited than they are in residential leases. It is therefore essential for both parties to understand what they are entering into.
When might a lease contain a service charge?
Service charges are most commonly seen in leases where the property is part of an estate, or in buildings with multiple tenants. This is because in these instances it makes more sense for the landlord to organise services rather than the individual tenants who typically will not have a long-term interest in the property.
How are service charges charged?
Most commonly, the service charge will be a fair proportion of the costs incurred by the landlord, with the tenant’s proportion typically based on floor area relative to the whole estate or building. This allows the landlord to recoup the costs they incur and provides flexibility for the landlord as costs may rise and fall each year. The tenant may also benefit as they are only being charged for services actually provided. The downside for the tenant is that the service charge may vary significantly each year, particularly if costly repairs are needed. To limit this issue a tenant should always consider putting a cap on the service charge, though this may not always be agreed by the landlord.
A service charge may be a fixed figure each year. This method is more common where leases are shorter as the costs of providing services is less likely to vary significantly. It also provides certainty to the tenant. The issue with fixed service charges is that the tenant may pay more than they should but on the flip -side, the landlord may incur higher costs than the fixed service charge allows them to recover. It is important to consider if this method of charging is appropriate for each transaction.
What services are included?
Many landlords will not allow much negotiation of their service charge provisions, as they are often set for an entire estate or building and should not have much variation between individual leases. What is covered depends on the type of property and services that may be required. It is worth noting that a lease will often allow the landlord to provide any additional service which they decide are necessary. If a tenant is willing to accept this, a tenant should usually request the clause is limited to ensure that the landlord acts reasonably when providing services so as to avoid incurring unnecessary service costs. Conversely, tenants should ensure that the landlord is obliged to provide certain services (such as repairing the structure of the building), as sometimes leases allow a landlord to stop providing services as well. It might also be worth checking that the landlord cannot include items in the service charge which the landlord has agreed should remain its responsibility, for example inherent defects or improvements.
Before committing to a lease, it important to understand the service charge obligations whether you are a landlord or a tenant. Since these clauses can be complicated, we always recommend that you seek legal advice.
For further information or legal advice, please contact law@blandy.co.uk or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.
