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Commercial landlords have various legal obligations and must ensure that a property is in good repair, meets health and safety requirements and energy efficiency standards. In addition, the premises must be sufficiently high-quality to attract and retain good business tenants. But, of course, all of this comes at a cost.
That’s why commercial tenants usually pay an annual service charge to their landlord in addition to their rent. The purpose of the service charge is to enable the landlord to pass on any additional costs of running or maintaining the property. What’s included depends on the terms of the lease, which in turn may be influenced by factors such as the building’s size, type, and condition. But typically, service charges cover the cost of overheads such as:
- Gardening and outdoor maintenance.
- Cleaning, decorating, and maintaining common areas of the building.
- Insuring common areas.
- Lighting and heating common areas.
- Servicing alarms, fire extinguishers and emergency lighting.
- Maintenance and repair of lifts.
- Any on-site staff such as security staff, shared receptionists and estate management.
Some of these overheads are irregular or difficult to quantify accurately. Accordingly, tenants pay a sum in advance upon receiving the landlord’s estimate. The landlord prepares a demand for a balancing payment at the end of the accounting year if the actual expenditure exceeds the estimate.
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Terms of the lease
The lease should set out clearly the details of the service charge and what is and what is not recoverable from the tenant. Unlike residential leases, it’s not implied in the lease that the service charges must be reasonable. And neither are there any statutory consultation procedures for planned major works. The landlord or tenant’s position in a service charge dispute largely depends on the lease wording.
Commercial property service charge disputes
Commercial service charges are frequently contentious, usually because the tenant believes charges are unjustified. Common arguments include:
- The precise terms of the service charge in the lease.
- Whether the charge or an increase in charges is fair.
- Hidden charges.
- Work not carried out or failing to meet a satisfactory standard.
- Disputes over reserve or sinking funds.
- Dilapidations disputes.
- Recovery of unpaid service charges.
Avoiding a service charge dispute
Clarity is crucial, and a commercial lease must be clear and specific about what’s included in the service charge. Unclear terms swiftly lead to disputes, with each party working based on their own interpretation. However, the charges should also be fair and reasonable. For example, if a commercial unit has a small area of lawn outside, it won’t require the weekly year-round attention of a gardener.
Disputes can prove very expensive for both parties, and avoiding them in the first place is advisable.
The Royal Institution of Chartered Surveyors (RICS) has produced a professional statement outlining best practice guidelines and standards. One of the aims and objectives of the statement is to “provide guidance to solicitors, their clients (whether owners or occupiers) and managers of service charges in the negotiation, drafting, interpretation and operation of leases, in accordance with best practice.”
A landlord should always attempt to foster a good working relationship with a tenant. Clear, open communication and promptly addressing any concerns the tenant raises helps build trust. As does acting fairly and reasonably and ensuring that maintenance and repair obligations are current.