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If you are a commercial tenant with a commercial lease, you occupy a commercial property or part of it as your business premises. Your commercial landlord will permit you to carry out specific business activities on the premises, and in return, you will pay rent. A lease agreement is a legally binding contract that governs your commercial lease, and this may contain a provision that requires you to pay service charges to your landlord for certain services. This article will explain what a tenant needs to know about service charge costs in a commercial lease to avoid unnecessary service charge disputes.
Service Charges
A service charge is usually a charge your commercial landlord requires you to pay for shared areas, sometimes termed communal areas or common parts of the property you occupy. It provides for the costs and expenses your landlord incurs for keeping these in good repair and condition. A service charge is not your rent payment but is in addition to this.
There should be a specific provision in your commercial lease which contains all the details about your service charge. This should include the following:
- what services it includes;
- how your proportion payable is calculated;
- whether third parties will carry out the services the service charge covers; and
- whether the service charge is limited or you requested a cap on this, which you might negotiate with your landlord at the start of the lease.
Points to Note
If you pay a service charge as part of your commercial lease, there are some essential points about it you should be aware of as a commercial tenant. We explain some of these as follows.
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What it Concerns
A service charge covers the repairs and maintenance costs of the areas it refers to. It can, however, also include building insurance or management charges. Therefore, it does not cover, for example, charges in terms of:
- replacing;
- rebuilding; an
- bettering.
The areas the service charge applies to should be those which you, as a commercial tenant, share and have access to. So, if you are in a self-contained property, it may only apply to, for example, the following:
- roof;
- structure;
- foundations; and
- exterior.
However, if you are in occupation of part of a property, it may, for example, also include:
- lighting;
- lifts;
- estate staff;
- corridors;
- loading bays; and
- shared kitchens.
Your lease may also allow your landlord to demand ad hoc sums in addition to the regular service charge where expenditure arises, which the service charge does not cover.
Fair Proportion
When your landlord requires you to pay a service charge as part of your commercial lease, it is crucial that what you pay for is a fair proportion.
Also, your landlord may need to recalculate your portion if things change within the lease. If things change and they do not and the service charge becomes unreasonable, you are not legally obliged to pay it.
You will typically pay your fair proportion for the service charge alongside your rent, but your commercial lease will state the exact requirement. VAT will be applicable on a service charge if it is for your rent. Sometimes, a landlord will fix a service charge at a specific percentage of the likely services over a particular period. Sometimes, they can be proportional and relate to your proportion of the entire property.
Landlord’s Obligations
As your commercial lease will detail your landlord’s obligation concerning the service charge, it is helpful to note what these might be. At a minimum, they will generally require your commercial landlord to:
- ensure the building is in good repair and condition, which includes the roof, structure foundations and exterior, amongst other areas;
- to provide heating and conditioning as necessary to common areas at reasonable times and temperatures; and
- ensure that service corridors and loading bays are accessible to ensure you can have deliveries as required.
In some commercial leases, there may be obligations that the landlord may not always have to provide, but when they do offer them, the service charge then becomes due. This may, for example, apply to cleaning or gardening.
This cheat sheet outlines what you should be aware of in your lease agreement.
Disputes
There may be times when you dispute your service charge in your commercial lease as a commercial tenant. Your commercial lease agreement should include details on how to do this. Often, it will require experts to assist you and your commercial landlord. It can also include:
- alternative dispute resolution; or
- mediation.
Key Takeaways
If your lease agreement contains a provision about service charges, this is an additional payment you will make to your landlord in addition to your rent payments. It covers the costs your landlord incurs for repairs and maintenance of communal areas in the property. You must understand service charges, and there are various points to note.
For example, you should be aware that a service charge will cover the roof and structure of the property. However, occupying part of a property can also include other things, such as corridors and loading bays. A service charge amount must be a fair proportion for you as a tenant, and your landlord will have specific obligations concerning the service charge, as the lease agreement will detail.
If you need help understanding service charges in commercial leases in the UK, LegalVision’s experienced leasing lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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