Each month we invite readers to submit questions on a burning issue they face in their business. We then turn to an expert in the field for the answer. Sukhbir Sangra, an associate at Neves Solicitors in Milton Keynes, assesses an issue affecting both tenants and landlords of commercial premises: the service charge.
My company is preparing to move premises into a multi-occupancy building on a business park in the area. We are a young business moving into an office for the first time because we need to keep pace with the company’s growth and to accommodate our expansion plans. What does a service charge entail and what should we be considering as we prepare to sign the lease?
SUKBHIR SANGRA: If you are taking a new lease or buying an existing lease of premises, you may be asked to pay a service charge if those premises form part of a building, a commercial estate or a shopping centre.
A service charge is an amount charged by the landlord to the tenants to cover the cost of repair and maintenance of structural parts of a building, areas that are used in common between tenants and any services or facilities that are provided by the landlord, such as repairing, maintenance, cleaning, lighting, heating and security.
It is important that you consider the possible extent of your liability for service charge payments before you sign the lease because these costs can be significant and sometimes equal or outweigh the amount of the rent payable under the terms of your lease.
An estimate of the cost of the service charge is normally produced in advance for a calendar year and the sum is then divided between the tenants and split into equal payments during that year. However, not all landlords operate a structured service charge mechanism and some may charge on an ad hoc basis as and when costs arise.
Q: How can I find out the cost of the service charges?
SS: Service charge costs can fluctuate and unless you agree with the landlord to cap the cost of the service charge to a fixed amount each year, there are no guarantees that the service charge costs will be a consistent amount throughout the lease term.
As a starting point, you should ask the landlord to provide a copy of the current service charge budget and audited accounts for the last three years. You should also ask if the landlord anticipates there being any one-off significant items of expenditure in the near future. If so, you could end up paying the cost of expensive repairs for which you would have limited benefit under a short-term lease.
The information should give you details of past service charge expenditure and the likely service charge costs for the coming year. It will also identify any significant increases in service costs during that period. If you have any concerns, you may wish to consult a surveyor to evaluate whether the amount of the service charge is appropriate.
Q: What is included in the service charge?
SS: The budget and lease will usually set out what costs can be recovered by the landlord under the service charge. There is likely to be a provision which allows a landlord to recover any costs which they deem necessary for repair and maintenance.
Landlords are reluctant to vary service charge provisions in a lease in order to keep continuity between tenants but there are costs you should seek to exclude, including (but not limited to) those:
- To cover a shortfall in the service charge payment due to part of the building/estate being unlet or one or more tenants having been given a service charge concession;
- To remedy any default of another tenant;
- Arising from the occupation of any other part of the estate by the landlord or a party connected with them, which are not occupied in connection with the management of the estate;
- To cover reinstatement of any insured risk, when the landlord can recover the cost through their insurance;
- To upgrade the building/estate when the long-term gain is likely to benefit the landlord but not the tenants;
- To market the building/estate or selling /reletting the landlord’s interest in it.
Service charges in commercial leases can be complex and onerous. It is important that you seek legal advice before entering into any lease where a service charge is payable.