Service Charge

service chargeService charge provisions in a lease are intimidating and yet they are one of the areas of a lease which result in more litigation and complaints.   You can have a premises which effectively gives the landlord a blank cheque book and there is nothing you can do about it or is there?  I hope this short video guide will give tenants some useful tips and ideas where you have to take a lease with a service charge.

The service charge provisions in most leases are situated at the back of the lease in one of the schedules often one of the last schedules so right at the back.   In the main body of the lease there will be a tenant’s covenant to pay the service charge and in the landlord’s covenants, there will often be a series of covenants from the landlord covenanting to provide a list of services to the building or where the premises are situated on an estate, to the estate and building.

In the service charge schedule there will be a long list of the items which the landlord can include in the service charge including for example repair of the building including structure, roof, foundations, repair, cleansing of the outside of the building, providing heating and lighting for the building, providing security for the building, fire alarm systems, door entry systems, signage for the various tenants of the building.

In shopping centre leases, the service charge provisions include vast lists of items which are included in the service charge including the cost of providing advertising for the centre, displays and entertainment in the shopping centre, borrowing money to fund the service charge items.

Tenant’s usually pay either a fixed percentage of the expenses incurred by the Landlord or a fair and reasonable proportion.   The percentage is usually based on the total lettable floor area of the premises occupied by the tenant as a proportion of the total lettable floor area in the building or the shopping centre or the estate.   There is often provision to vary this proportion if other lettable units are added or taken away.

Tenant’s solicitors often try to add words into service charge provisions to protect their clients such as trying to provide that any expenses, fees and outgoings must be fair and reasonable.   However, landlords and their managing agents do not want tenants challenging every single item of expenditure.  They do not want to have to shop around for their insurance, repair and maintenance contractors etc.   They want the freedom to operate and manage the building without being scrutinised by the tenants.

There is usually provision in the service charge schedule for the tenant to receive a statement of the expenses incurred or service charge accounts.  Some leases even provide that these should be properly audited by independent accountants.   Some leases provide that the tenant can demand to see the receipts and invoices which underpin the expenses shown in the service charge accounts.  Whilst this provides some protection, it still does not mean that the Landlord has to find the best prices for the items of expenditure.   This is the thing that most tenants find hard to understand but this principle is supported by a number of cases.   The Landlord merely has to demonstrate that he has not always picked the most expensive provider but he is not obliged to pick the cheapest.   Of course, many landlords have their own contractors and employees who provide the services and though they may charge the tenants at market rate, it is not costing the landlords this price so this can be very lucrative for landlords.

Are there any solutions to this unfair practice?   Well, we are in a buyer’s market and tenants have considerably more clout at the moment in this depressed financial environment.  So tenants should be asking for capped service charges where the figure a landlord can charge cannot exceed a certain figure in each service charge year so that the tenant has certainty about the service charge figure and can budget.

Landlords often operate sinking funds where all of the tenants pay into a fund which is built up over the years to spread the cost of replacing or repairing major items of expenditure such as the roof or lifts or air conditioning.   These are fair to both parties and much better than being hit by massive amounts of expenditure without any warning.

Service charges are a difficult area but I hope have given you an introduction to some of things you need to watch out for.   It is a good idea to consult a solicitor experienced in dealing with leases and service charges to make sure you get the best advice.

One Response to “Service Charge”

  • SABBIR:

    Hi ,
    I am one of those who signed lease without being told by my hired solicitor what I was signing,only interested in getting the shop so I could start business.Now I am lumbered with this lease and service charges.The landlord charges me for services that are not beneficiary to my premises (shop is below block of flats in a parade owned by landlord)I am not shown any evidence works were carried out when and where.None of works have been carried out on my premsies.They have also charged me in advance for future works and will in due course demand it.
    What do you think? how can i avoid these charges.

    Thanks
    Sabbir

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Dominic Beeton, Solicitor
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