Service Charges in Commercial Leases – Who, What, Where and How?

Leases of commercial premises which form part of a larger building or estate will often include a right for a Landlord to collect Service Charges from their Tenants, covering the Landlord’s costs of maintenance of shared areas and structural parts, but sometimes extending to other services such as the provision of security and lighting, along with employing cleaners, accountants and property managers.

While tenants of residential leases benefit from a number of protections in law as to what charges their landlord can recover, and how, the same protections do not extend to commercial tenants. With a recent dispute in London turning on Service Charge arrears over £2 million, it is key that Landlords and Tenants consider their positions carefully.

Where a Landlord and Tenant agree that a new Lease will include payment of service charges, it is key that the following are considered and set out clearly in the Lease:

  1. What services can the Landlord charge their Tenants for under the Service Charge? Are the costs which are chargeable restricted to those which are ‘reasonable’?
  2. Is the Landlord required to provide the services, or are these discretionary? Can the Landlord change the list of services in the future?
  3. How is the charge payable by the Tenant calculated – is this by way of a set percentage of the Landlord’s overall costs, or a ‘fair proportion’ according to the size of the Tenant’s demise or its use of the overall estate? Is there a cap on the amount of Service Charge the Tenant is required to pay?
  4. Will the amount payable by the Tenant increase if other units on the estate or in the building are not let out?
  5. Is the Landlord required to provide an annual audited Service Charge budget for the coming year to their Tenants?
  6. When is the Tenant required to pay, and what happens if they have over- or under-paid Service Charges by the end of the year?
  7. Is there a procedure set out in the Lease if there is a dispute between the Landlord and the Tenant over Service Charges?

At Else solicitors we can advise Landlords and Tenants on Service Charge provisions in existing Leases and help negotiate clauses in new Leases.

A well-drafted Lease and both parties obtaining proper advice should help prevent disputes in future. However, disputes can arise, often in relation to whether a Landlord can charge a Tenant for a service, if the cost is reasonable and how much of the charge is attributable to one Tenant. Recent cases have also turned on whether a Landlord is overcharging Service Charges as a means to fund improvements to their property, rather than simply the cost of normal maintenance or repairs. Our property dispute resolution specialists can advise Landlords and Tenants when a dispute arises over payment of Service Charges.

For more information please contact our Commercial Property team or Dispute Resolution team on 01283 526200.

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