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Service charge – issues for landlords and tenants

Service charges in leases

Leases with service charge provisions

If the let premises form part of a building or estate (e.g. an office block, a shopping centre or an industrial estate), the lease is likely to contain service charge provisions. These will require the landlord to provide certain services and facilities (e.g. repair, decoration, heating, lighting, security) and the tenant to contribute towards the cost.

Our Property folder has a wide range of leases with service charge provisions, including for shops, restaurants, offices and industrial property.

How to draft a service charge clause

Our template leases set out a detailed service charge mechanism and give examples of the types of services and facilities that might be provided.

When a landlord is preparing a draft lease, he should ensure that the service charge clause contains a comprehensive list of the services he intends to provide, as well as a “sweeper” clause that allows him to add to or vary the services in the interests of good estate management. Some service charge clauses make provision for a sinking fund or a reserve fund in which money is accumulated for future major expenditure.

If a landlord will be engaging a commercial property agent to manage the service charge and the agent is regulated by the Royal Institute of Chartered Surveyors (RICS) (and/or are a member of RICS), then the lease should be drafted so as to be compliant with the RICS Professional Statement: ‘Service charges in commercial property (1st edition)’ which comes into force on the 01 April 2019. This statement sets out mandatory obligations supported by core principles that an agent must comply with. If an agent who is a member of RICS or is regulated by RICS fails to comply with this Statement, the agent could face legal and/or disciplinary consequences.

Service charge accounts and payments

Typically, service charges are paid on account, based on the service charge budget for the year. There is an adjustment at the end of the year, when the accounts are settled, and the tenant will either have to make a top-up payment or receive a refund (which may be in the form of a credit against the next service charge bill). Some landlords operate a less formal service charge whereby charges are raised on an ad hoc basis.

What does a tenant need to know about service charges?

Tenants should seek detailed information about the service charge before entering into a lease. They should request the last three years’ accounts and details of the current year’s budget. If the tenant is concerned about the lack of certainty over service charges, it may be possible to negotiate a service charge “cap”, whereby the annual service charge will not exceed a certain figure. This figure could be increased by reference to an index (e.g. the retail prices index) each year.

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