How Landlords Calculate Service Charge Costs

Commercial leases of parts of a building on an estate will usually contain ‘service charge’ provisions. These relate to the costs that the landlord incurs in looking after the common parts of the building that the tenants all share use of i.e. lifts, stair wells and entrances etc. The landlord then re-charges these costs back to the tenants via the ‘service charge’ clause in the lease.

Service charge clauses normally have 4 elements, the first sets out exactly what the services are that the landlord is to provide and for which the charge is made, the second is the tenants obligation to cover these charges, the third is the landlords obligation to actually provide the services and the fourth is how the service charge is to be calculated and paid and what happens in the event of a dispute between the landlord and the tenant.

There are some things that tenants should try to resist being included within the ‘services’, these include things such as; the cost of repairing inherent defects in the building, costs relating to any collection of rent from other tenants and costs relating to any parts of the building that do not currently have tenants occupying them.

Many commercial leases contain service charge clauses that say ‘the tenant will pay a ‘fair proportion’ of the costs as conclusively determined by the landlord’s surveyor’. The basis for how this ‘fair proportion’ is then calculated is not usually set out in the lease.

This ‘fair proportion’ method is a flexible one for the landlord, usually the landlord’s surveyor will split the service charge fairly between all the tenants in the building by reference to relative floor area or to the rateable value of the property being leased. The floor area method can cause issues when you have single tenants occupying a large space, who will therefore, use proportionately less of the services than a number of single tenants who together, occupy the same aggregate space. The rateable value method can also cause issues where the property is new and does not yet have a rateable value. Also, rateable values can be affected by improvements to the property which has no bearing on the tenant’s use of services.

The alternative to the ‘fair proportion’ calculation is to have a ‘fixed proportion’ from the outset, for example, if there are 3 floors in a building with a tenant on each floor then each tenant is to be responsible for a 33.3% share of the service charge costs. The problem with this method is that if the building was ever subsequently extended, thereby reducing the tenant’s percentage share of the building, the proportion of the service charge payable would remain the same.

When looking at the potential pitfalls of the above methods, it is important during the negotiations of a lease to consider your use of the services and how you would prefer them to be calculated in order to avoid uncertainty and disputes later on. It is also important to ensure there are provisions to cover situations where one tenant’s use or benefit of services is significantly more than the others.

However, on a more positive note for tenants, there are cases that suggest that the landlords ability to recover substantial sums of money from tenants via service charge can now be restricted, particularly where the costs incurred relate to major repair works and the lease is for a relatively short term or there is only a short period left before the lease expires. In one particular case the tenant had a 3 year lease with only a few months left to run when the landlord requested that the roof be replaced. The tenant was found only to have to contribute to the cost of patch repairs instead.

For further information on the above or advice regarding any other property matters please contact Sarah Norton on 01283 492963 or sarah.norton@smithpartnership.co.uk.