The Explainer - Service Charge Top Tips
For commercial tenants, service charge budgets can often be a source of surprise. What should tenants look out for? This article gives some service charge top tips.
What is a service charge?
Whenever there is more than one tenant in a building, there is likely to be a service charge. The service charge is intended to allow the landlord to recover the cost of repairing and managing the whole building. This will typically cover services things like the exterior maintenance of a building and the cleaning of common areas. It might even cover things like Christmas decorations!
The Basic Problem
The amount and full extent of the service costs is not normally known at the start of the lease.
A tenant will often be asked to sign up to an uncapped service charge. This can be a significant liability and you need to understand it as clearly as possible.
What to Look Out For
There are a few key things to look out for. These include:
- Estimated budgets
Service charge arrangements often require tenants to pay an estimated amount in quarterly instalments. A final reconciliation is then normally carried out at the end of the service charge year and a balancing payment made. Tenants should proactively monitor the landlord's estimates of the service charge over the year.
- Service charge items
A commercial lease will often contain a list of service charge items. This can be a long list, often buried in a schedule to the lease. Tenants should check what is included before they sign the lease. A tenant would not wish to find the landlord dramatically improving the value of their property and then using the service charge to recover the cost.
- Justifying the charges
A tenant may well wish to see the receipts and vouchers for the costs actually incurred to make sure they are justified and reasonable. In some cases, an accountant may be asked to certify the costs claimed. However, the tenant may not be able to request this certification if the original lease wording does not allow it.
- Sinking or reserved fund
Tenants should make sure they understand if sums are being collected and retained for planned or unplanned future items. Typically this could be for large items of plant or equipment that may need to be replaced periodically (lifts, boilers, etc). Tenants on shorter leases may find it unpalatable to find out they are contributing towards items they will never receive a benefit from.
- Disputes
There is a risk of formal dispute about service charges. The Royal Institution of Chartered Surveyors (RICS) has published a 'service charge code' which sets out best practice and how to minimise this risk. However, this code is only guidance. It will not necessarily bind the parties involved. There may still need to be recourse to a dispute resolution mechanism. The costs of this may be significant. Often, expert determination is seen as more cost effective than a Court, but it may not be an option. Finding out how disputes or queries will be resolved is worth ascertaining before a lease is signed.