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
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
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.