A recent court case decision will be of particular interest to landlords of commercial buildings who have any type of service charge within their tenant’s lease.
Whether you are a landlord with a suite of multiple commercial properties across the country or own a single commercial unit which you rent out to a business, it is important to ensure that you are approaching service charges in the correct way and are avoiding a dispute over, what could be quite substantial sums.
Landlords have a number of legal obligations and must ensure that properties they lease out are in good repair, meet health & safety requirements, energy efficiency standards and are of high-quality to attract and retain good business clients. With this responsibility comes several costs towards upkeep. Some of these costs will be manageable in monthly small sums, but from time-to-time landlords could be faced with extremely high costs, should buildings require major works. This is where a service charge can help to recoup these costs and pass them onto the business who is occupying the unit and benefitting from its daily use.
Our Dispute Resolution team at Lamb Brooks discuss service charges, the importance of clear lease terms and what to do when faced with a dispute.
Service Charges Explained
A service charge for a commercial property is a sum charged by the landlord to a tenant as part of their lease agreement. This is a payment, separate and in addition to their normal rent. The purpose of a service charge is to pass on any additional costs of running or maintaining the property from the landlord to the tenant.
A service charge is usually charged annual and the sum will greatly depend on the size and type of property. A very small, single unit may not incur many additional expenses and a landlord could decide to waiver any service charge, or charge a low amount for some general maintenance work. A larger, multi-purpose building may have very high overheads that the landlord is initially responsible for.
If the unit is shared, then the annual cost of all the services should be divided proportionately between the tenants.
There is often wriggle room in service charges between landlords and tenants. Tenants could offer to manage aspects of the upkeep of the property themselves to bring the service charge down or negotiate a lower sum, a free year etc. as part of their uptake of the lease. A tenant will likely expect or request that a cap is put on the service charge which allows them to budget each year.
What is included in the service charge will depend on the building and the terms of your lease. Some common aspects would include:
- Outside maintenance of paths, roads, carparks, fences etc.
- General gardening
- Cleaning of common areas
- Insurance of common areas
- Repair works
- Lighting repairs and upkeep
- Servicing of alarms, emergency lighting, fire extinguishers etc.
- Maintenance and repairs of lifts
- Staff on the premises, such as security, shared receptionists, cleaners or estate management
Disputes Over Service Charges
Commercial service charges can be a frequent point of dispute between landlords and tenants. Often this is because tenants cannot see how charges are justified. This is why it is important for landlords to be explicit about what is covered within the service charge. Both landlords and tenants should be aware of their responsibilities and what aspects of the building’s upkeep they are each accountable for.
Some cases that escalate to a dispute could include:
- Tenants arguing over the fairness of service charges
- Tenants disputing increases in service charges
- Disputes over the terms of a lease or service charge
- Hidden costs of a service charge
- Dispute over works not being carried out
- Whether service charge costs could be reduced after early exit of the lease
- Disputes over sinking funds or reserve funds
- Disputes over repair works and who is liable for costs
- Recovery of unpaid service charges and / or rent arrears
- Dilapidation disputes
Avoiding a Dispute
A commercial landlord should be very clear and specific about what is included within the service charge.
Charges should also be fair and reasonable. For example, a commercial unit with a small patch of grass outside would not require a weekly landscape gardener and shared staff included in the premises should be paid market-rate wages.
RICS (The Royal Institution of Chartered Surveyors) have published a Professional Statement (the RICS 2018 Professional Statement) which sets out best practice, guidelines and standards. This ‘code of practice’ could be used if a dispute arises between a landlord and tenant, so it is worth being familiar with the contents and reviewing from time to time, particularly when taking on a new lease with a commercial client.
The commercial lease will be your go-to when it comes to defending any claims. It is important that you, yourself as the landlord fully understand it. If you are using a template or an old lease that has been amended multiple times over the years, it may be time to invest in a new fresh lease with the expert eye of a Solicitor cast over it. The lease acts to protect the landlord, so shouldn’t be skimmed over and must be fit-for-purpose. Whilst you might be keen to secure a new commercial tenant, it is important that you are starting off on the right foot.
The wording of your lease should be understood fully by both parties. It should be clear and not open to interpretation. A water-tight contract can protect you in the future should you experience any challenges, so it is worth some investment.
Landlords should try to foster a good working relationship with their tenants, one which has open communication, so that any concerns or complaints can be discussed calmly and sensibly. Communicating promptly, keeping repairs up-to-date and ensuring that you are always acting in a fair and reasonable manner can help you to keep the relationship positive.
Sara & Hossein Asset Holdings Ltd V Blacks Outdoor Retail Ltd
The Supreme Court has recently dismissed a retail tenants final appeal in a long-running dispute over services charges with its former landlord. Whilst in this case the claim was dismissed, it does leave the door ajar for other tenants seeking to reclaim or challenge service charges imposed by landlords.
Blacks failed to pay their service charge for the period of 2014/18 and 2018/19, despite the amount for one year alone amounting to over £400,000. Blacks claimed that the sums were excessive and that some of the included sums were not due under their lease agreement.
The Supreme Court determined by majority that the landlord certificate as to the ‘total cost and sum payable by tenant’ was conclusive as to the amount of the total cost and sum payable by the tenant. However, it did hold that the certificate was not conclusive as to the underlying liability as to the service charge.
What was of particular interest in this case was the lead Judge, Lord Hamblen, stated that the service charge clause was “not a ‘pay now, argue never’ provision, but rather a ‘pay now, argue later’ provision”. Which could be interpreted by other commercial business tenants that they could pay service charges and the back door would be left open for a counter claim or dispute later down the line.
Landlords should therefore not count their chickens when a service charge is paid in full by their tenants, but should air on the side of caution should they be challenged at a later date. This may mean setting aside sums or at least part of the sums as a safety net until sufficient time has passed for a claim to be made.
Legal Advice on Commercial Property Disputes
Our Dispute Resolution Team at Lamb Brooks have over a decade of experience in litigating property disputes involving both residential and commercial landlords and tenants. The landlord and tenant relationship can be complicated, but it is vital to get right in order for both businesses to be successful.
If you find yourself embroiled in a dispute with your commercial tenants, there is a number of risks that you will want to protect yourself from, including court action, penalties, un-let properties or unpaid rent.
Getting stringent, carefully considered legal advice can make sure you navigate complex disputes properly and obtain the best outcome – ideally so that you can continue to lease your building with a happy client intact.
For more information or to arrange a meeting with a specialist dispute resolution Solicitor, please get in touch. Call us on 01256 844888, email enquiries@lambbrooks.com or speak to our online chat assistant who can take some initial information and put you in touch with a member of our team.
The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.