This article was originally written for and featured in Fresh Business Thinking.
If you are a tenant in a multi-let building or of a unit on an estate it is very likely that you are required to pay a service charge to your landlord representing a proportion of the cost that the landlord incurs in providing the ‘services’ set out in the lease. Being very clear on the service charge provisions is an important part of lease negotiations when taking on a new property as the charge is very often reserved in the lease as an additional rent. This means that if you fail to pay the service charge then the landlord would have all of the options open to it as if you had defaulted in paying the principal rent. (for example forfeiture of the lease, rights of distress, interest charges or refusal to accept a break notice) and not simply a claim in debt.
Here are what we consider to be some of the more important issues to look out for when reviewing a service charge clause:
- Review the list of services set out in the lease against those in the service charge accounts and budget which you have been shown to make sure they correspond. If you haven’t been shown any be sure to ask for them. Note however that service charge clauses often include a catch-all clause that allows the landlord to make additional charges “in the interests of good estate management”.
- It is usual to ask for the last 3 years’ service charge accounts. Make sure you look for any recent large or unusual items of expenditure. Query anything you are unsure of, but high expenditure may well mean that the work (such as roof repairs) won’t be required again in the near future.
- Check whether there is a reserve or sinking fund and how frequently it is drawn upon by the landlord. If there is a consistent low level withdrawal from the sinking fund this may indicate that the current service charge is not sufficient to cover costs and so query with the landlord whether an increase in the budget is planned.
- Check the budget for the current and any future service charge period to see that there are no planned increases.
- If you are to pay the service charge in advance based on an estimated figure, make sure that the lease details arrangements for the refund of overpayment or top up of underpayment of charges whether during or at the end of the term of the lease. It may be that any overpayment will be rolled over and credited to your next invoice, but this should be made clear.
- Make sure that, when making your first payment, the correct apportionment has been made between you and any previous tenant and you are not covering charges that should not apply to your period of occupation of the property. It is usual for an outgoing tenant to pay the full amount of service charge due from completion to the next payment date, if the confirmed figure is known, with the incoming tenant reimbursing them accordingly. However, if the charge is only an estimate at the point of completion, make sure you get a retention from the outgoing tenant to cover any additional charges relating to their period of occupation which may be required by the landlord at the end of the service charge year.
In general service charge provisions tend to be fairly standard and should ideally be drafted taking into account standards set out in the Code for Leasing Business Premises. However, not all clauses are the same and so the points above should go some way towards helping you ensure you are dealt with fairly with minimal surprises when you receive your service charge demand.