A service charge is a charge levied by the landlord on tenants for services provided to a property – for example, lighting and heating common areas, maintaining the car park.
A service charge is most likely to be found where the property occupied by the tenant forms part of a building or part of an estate owned by the landlord.
The landlord wants to try to ensure that rents obtainable from such properties are not reduced by the landlord having to pay for various services provided to the individual units or common areas of the building or estate. This is often in direct conflict with the tenant’s aim which is to carve out items from the service charge that it thinks the landlord is liable to pay for.
The landlord cannot charge for items which are not specified in the lease. A comprehensive list of services should be included in the lease. Tenants and landlords should be having discussions upfront on potential issues under the services provided so that only relevant services are included.
A tenant will not generally be expected to pay to upgrade or improve the landlord’s property as opposed to repairing it.
Unless there is an express term which states that charges are to be fair and reasonable, reasonableness will not be implied. This does not mean that the landlord has the ability to charge whatever it wants as a court would likely find against a landlord who carried out services to the highest possible standard regardless of the nature of the property and sought to recoup this from the tenant.
The tenant should ask for and the landlord should provide an estimated costs schedule to the tenant of the anticipated service costs.
The service costs will then be payable by the tenant on an estimated basis.
At the end of the relevant period, the landlord will confirm to the tenant the actual costs of the services and whether the tenant has overpaid or underpaid for these. If additional payments are due these will be requested from the tenant. If there has been an overpayment, this will usually be used as credit against the next service charge payment due.
The content of a service charge clause depends on the relative bargaining strength of the parties, but it should include as a minimum:
Although it is impossible to guarantee that a dispute will not arise at some stage, the risk can be reduced where the lease terms are clear and the parties know precisely where they stand in relation to the provision of services and who is liable to pay for them.
If you need any advice on service charges, please contact a member of our commercial property law team in confidence here or on 02920 829 100 for a free initial call to see how they can help.
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