The reservation of Service Charges in Commercial Leases
Where a Landlord grants a lease of a multi-let building, it will often recoup the costs of running the building by way of the reservation of a service charge.
In contrast to residential premises, commercial service charges are not subject to extensive legislation. Much will depend on the bargaining power of the parties, who are free to negotiate whatever service charge provision they wish. However, both parties should take care to ensure that the lease protects their interests in this regard.
Older leases contained shorter provisions with regard to service charges, requiring the tenant to pay a fair proportion of the landlord’s expenditure in repairing unlet parts of the building.
More commonly, newer leases set out a detailed mechanism, stipulating the landlord’s obligations to provide the services and expressly stating those services which are to be provided. Modern leases often include the method of calculating the tenant’s proportion of the overall services. This may be by reference to an apportionment of the floor area, or the rateable value of the demised premises, though the tenant should ensure that the proportion is fair and reasonable in the circumstances, whatever the method of calculation.
The tenant may wish to exclude the provision of a number of services from the costs of the service charge (such as those remedying an inherent or latent defect, or costs incurred by the landlord in relation to breaches of covenant by other tenants). In some instances however, the tenant will wish to ensure that it is still incumbent upon the landlord to perform such services.
In modern commercial leases, tenants usually pay an interim service charge (often in tandem with the payment of principal rent on the relevant quarter days). At the end of the relevant accounting year, the landlord’s accountant will then provide a certificate of actual expenditure, with a demand being issued in relation to any shortfall or a reimbursement made in respect of any balancing credit.
Some leases provide for a reserve of sinking fund, allowing the landlord to hold funds on trust for the tenants in relation to substantial items of expenditure, thereby spreading the costs in relation to major works over a number of years. Shorter-term tenants may seek to resist such provisions, where it is unlikely they will benefit from such future works.
Tenants may wish to secure a cap in relation to the service charge, though from the tenant’s perspective, care should be taken to ensure the lease imposes a genuine cap rather than reserving a fixed charge at the specified sum.
Service charges are a principal area of contention in leases and professional advice should be sought at an early stage.
For more information, please contact our Commercial Property team: