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Commercial Service Charge: what do you need to consider?

Generally, service charge provisions in a lease are only required where the lease is for part of a building or part of a large estate (i.e. industrial estate, shopping centre, business park).

During the initial lease negotiations between a landlord and tenant, service charge will be discussed but for the inexperienced tenant (and/or landlord) this may not be a main focus, leaving the extent of what should comprise the service charge down to the lawyers.

A landlord’s preference would be for the service charge provisions to have a wide scope, thereby covering all possible services as well as those that may arise in the future. The landlord’s intention is recover 100% of the service charge costs from their tenant, leaving the annual rent as pure profit. On the flip side, the tenant will seek to limit the scope of the services to those that are relevant and in turn keep the service charge low.

What costs are recoverable as service charge?

So long as the landlord can show the services provided benefit the tenant then all costs are recoverable. However, the landlord cannot be seen to be making a profit, meaning the landlord must only charge their tenants the costs they incurred. If the cost of any services be less than budgeted, the tenant is to be refunded the overpayment.

Maintenance, cleaning, heating, cooling, water and lighting are the obvious services a landlord should provide as standard but depending on the property in question, other ‘standard’ services may include maintenance of fire alarms, lifts, barriers, grounds keeping, security - the list goes on. These services all quickly add up to become a costly expenditure which the landlord will want to pass on to their tenants.

It is finding the right balance between the current services the landlord provides and covering any changes in the future as to the services to be provided. The ‘sweep up’ clause commonly added to leases can be beneficial but itemising all known services is best practice.

What service charge matters should tenants consider?

For any tenant negotiating service charge terms, they should consider:

  • Agreeing an annual service charge cap;
  • Requesting a detailed breakdown of all the services provided by the landlord as at the current date and then cross referring them to the provisions in the draft lease to ensure the lease reflects the services in place;
  • How the service charge is to be calculated – fixed percentage or apportioned based on floor area;
  • Frequency of the service charge payments – annually, quarterly or monthly in advance.

Administration of the service charge

Administering and managing those services can be a time consuming and costly process with many landlords handing this over to an agent. Any management/administration costs can also be added to the service costs recoverable from the tenant.

Whilst the lawyers draft the service charge provisions it is down to the landlord or their agent to implement the provisions, with RICS regulated members/firms obliged to implement the provisions in accordance with the RICS 2018 Professional Statement.

To speak to a member of our Commercial Property team, call us on 023 8022 1344 or email us at contact@duttongregory.co.uk.