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Service Charge

The service charge allows a landlord to recover the day to day costs of maintenance and facilities used in common within a building. At times there may be issues with how services are being provided by the landlord or the charges appear may appear to be too high. This advice provides an overview of the costs recoverable under the services charge.

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An introduction to service charge

Most commercial tenants occupying multi-let buildings will pay a service charge.

The obligation to pay service charge allows the landlord to recover the cost of a variety of services in connection with the operation and maintenance of its property.

It is important that landlords are held to account for each item included in the service charge as there are limits to what is lawfully recoverable.

There is also a duty on the landlord to provide value for money, but how far does this obligation extend in practice?

What options are open to the tenant if there are problems with the services being provided?

These are some of the factors which make service charges a potential source of dispute between landlord and tenant. This page and the corresponding guide will highlight some of the main issues.

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Before lease negotiations

Understanding the service charges attributed to a property will help ease negotiations. Prior to negotiating ‘heads of terms’ for a new lease, a prospective tenant should obtain advice from a property professional.

Obtaining copies of previous years’ service charge accounts from the landlord may reveal significant items of expenditure as well as what charges to expect throughout the life of the lease. An experienced surveyor will be able to advise as to how the current level of service charge compares with similar buildings.

It may even be possible to negotiate a reduced or ‘capped’ service charge in certain circumstances. A cap may be time-limited and apply to the service charge as a whole or to specific items within the service charge.

Points to consider:

What expenditure can the landlord recover?

The lease will normally state precisely what services are recoverable and the lease provisions must be strictly adhered to. In most cases, the landlord must perform its obligations under the service charge provisions of the lease before a tenant’s liability to pay arises.

Landlords are usually entitled to recover their costs in relation to:

  • the day to day operation of the building, including utilities for common areas (if not separately metered)
  • repairs and planned maintenance.

However, they are only permitted to recover proper and actual costs.

The overriding principle is that tenants should only pay for those services from which they derive benefit. A ground floor tenant should not have to pay for the recurring maintenance of a passenger lift serving the upper floors, for example.

Tenants with a relatively short lease should not be expected to fund large capital expenditure by the landlord. Landlords who wait for ‘service charge caps’ to expire before charging back expensive works may find it difficult to justify recovery in full.

Improvements to the property

As a general rule, landlords cannot recover the cost of improvements and additions. In this way, carpeted lobby areas refurbished with fine Italian marble would always be considered improvements. However, there may be justification in replacing an ageing HVAC system with something more modern that is less reliant on ongoing expensive maintenance.

Value for money

Service charges in commercial property are to be run on an appropriate value for money basis. In practice, this does not necessarily mean achieving the lowest price. However, a tenant should only contribute to costs which are ‘fair and reasonable’.

Withholding payment

It may seem entirely justifiable to withhold payment if the services provided by the landlord fall below expectations. However, there is an underlying ‘reasonableness test’ as to what payments can be lawfully withheld. Before withholding any payment due under the terms of a lease, a tenant should seek professional advice.

Service charge disputes

It is not uncommon for disputes to arise in respect of service charges. Often these disputes relate to whether the tenant has a specific obligation to pay for certain services or how the service charge has been apportioned.

The starting point in a service charge dispute will always be the lease. Since 1st April 2019, the lease should be read with reference to the RICS Professional Statement on Service Charges in Commercial Property. The Royal Institute of Chartered Surveyors (which regulates its members and member firms) introduced mandatory requirements for service charge administration. In practice, this means that managing agents may be required to provide justification for their actions and can be subject to disciplinary and legal action from the regulator.

It is important that tenants seek expert advice from a legal or surveying professional at the earliest opportunity.

Most disputes will be resolved without the need for further action. However, sometimes it is necessary to seek additional remedies.

The RICS Statement encourages the use of alternative dispute resolution (ADR). Most new leases will provide for ADR referrals though, even if it does not contain an ADR provision, issuing court proceedings without first attempting ADR can be a costly mistake.

Equally, a landlord must comply with any relevant protocol with regard to recovering debt should it attempt to force the tenant to pay the service charge in dispute.

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