If you are taking a new lease or buying an existing lease of premises, you may be asked to pay a service charge if those premises form part of a building, a commercial estate or a shopping centre.

A service charge is an amount charged by the landlord to the tenants to cover the cost of repair and maintenance of structural parts of a building, areas that are used in common between tenants and any services or facilities that are provided by the landlord, such as repairing, maintenance, cleaning, lighting, heating and security.

It is important that you consider the possible extent of your liability for service charge payments before you sign the lease because these costs can be significant and sometimes equal or outweigh the amount of the rent payable under the terms of your lease. This will also better assist with you budgeting your business expenditure going forward.

An estimate of the cost of the service charge is normally produced in advance for a calendar year and the sum is then divided between the tenants and split into equal payments during that year. Any costs in excess of that estimate are then collected at the end of the year. Any overpayments will be credited to the next service charge payment. However, not all landlords operate a structured service charge mechanism, and some may charge on an ad-hoc basis, as and when costs arise. 

How can I find out the cost of the service charges?

Service charge costs can fluctuate and unless you agree with the landlord to cap the cost of the service charge to a fixed amount each year, then there are no guarantees that the service charge costs will be a consistent amount throughout the lease term.

As a starting point, you should ask the landlord to provide a copy of the current service charge budget and audited accounts for the last 3 years. You should also ask if the landlord anticipates there being any one-off significant items of expenditure in the near future, such as roof repairs or structural replacements. If so, then you could end up paying the cost of expensive repairs for which you would have limited benefit under a short-term lease. 

The above information should give you the details of past service charge expenditure and the likely service charge costs for the coming year. It will also identify whether there have been any significant increases in service costs during that period. If you have any concerns regarding the service charge information provided, then you may wish to obtain advice from a surveyor who has the necessary expertise to evaluate whether the amount of the service charge that will be charged to you is appropriate given the nature of premises and the length of the term being granted by the lease. 

What is included in the service charge?

The budget and lease will usually set out what costs can be recovered by the landlord under the service charge. There is however, in a standard service charge structure, likely to be a provision which allows a landlord to recover any costs which they deem necessary for the repair and maintenance of the building and/or estate. Though landlords are reluctant to vary service charge provisions in a lease (because they want to keep continuity between tenants) there are costs which you should seek to exclude, including (but not limited to):

• costs to cover a shortfall in the service charge payment due to part of the building/estate being unlet or one or more tenants having been given a service charge concession;
• costs to remedy any default of another tenant;
• costs arising from the occupation of any other part of the estate by the landlord or a party connected with them, which are not occupied in connection with the management of the estate;
• costs to cover reinstatement of any insured risk, when the landlord can recover the cost through their insurance; 
• costs for upgrading the building/estate when the long-term gain is likely to benefit the landlord but not the tenants and;
• costs of marketing the building/estate or selling /reletting the landlord’s interest in it.

Service charges in commercial leases can be complex and onerous so it is important that you seek legal advice before entering into any lease where a service charge is payable. Our commercial property solicitors can provide specialist advice in this area. Call 0330 0945 500 email info@nevesllp.co.uk or complete our Contact Form and we’ll get back to you.