Service charges in commercial leases

Service charges enable landlords to recover from tenants the costs of making repairs and providing certain services. They can also provide a contingency against the cost of future expenditure. Service charges commonly arise where there is a need to maintain common or shared areas, such as shopping complexes or industrial estates.

 The terms of the lease will be the significant factor in determining what is covered by the service charge and the amount payable. The best protection, for landlords to ensure that it can recover costs of maintaining a site, and tenants to avoid excessive or unexpected expense, is to take care in the negotiating and drafting of the lease.

 Whilst residential service charges are subject to extensive legislation, which imposes statutory limitations on recovery, there is no similar protection for the commercial tenant. There is, however, some assistance from the Royal Institute of Chartered Surveyors Code of Practice for Service Charges in commercial property. Whilst it is only a code of practice, and therefore voluntary and not legally binding, the Code represents best practice for property professionals and landlords and tenants, and is a useful point of reference when negotiating service charges in a lease. Also, in the event of any dispute as to the nature and effect of those charges, it is likely that reference would be made to the Code in any court proceedings or other form of alternative dispute resolution. 

 Key elements of the Code are that services should be procured on a value for money basis, landlords should not profit from their provision, management fees be reasonable, the service charge be demonstrably fair and reasonable, costs be transparent, and items charged should be identifiable, allocated and apportioned, certifying of accounts should be non-partisan and as experts, ensuring certified costs have been incurred and are properly recoverable under the lease, budgets have an explanatory commentary and issued at least one month before start of service charge year, and statement of actual expenditure issued within four months of end of that year.