Key Points a Tenant Should Know About Service Charges in a Commercial Lease

As a tenant with a commercial lease, you will enter into a commercial lease agreement. This contract between you and your landlord contains the details of your lease and both parties’ rights and responsibilities. As a tenant, you may have a provision for service charges in your lease. This article will explain three key points a tenant should know about commercial property service charges.

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Service Charges 

If your commercial lease grants you sole possession or a portion of a commercial property as your business premises, it is possible that your landlord may lease other sections to different businesses. In this case, such as in an office block or a retail centre, there will be parts of the building that you and other business owners share. Typically, the commercial landlord is responsible for running these common areas, which includes repairs and maintenance. When doing so, they will naturally incur a cost.

Key Points About Service Charges

Service charge provisions in a commercial lease outline exact details about the charge. As a commercial tenant, it is beneficial for you to understand some of the key points related to these.

1. Negotiations

Before you enter a commercial lease, you should negotiate its terms with your potential landlord, which your legal team will head for you. This allows you to obtain the most advantageous lease provision in the agreement for you as a tenant. 

It is helpful for you to incorporate the service charge provision in your negotiation as a commercial tenant. Ensure you have a clear understanding of the specific areas covered by these charges, as well as what you may wish to arrange. For example, you can discuss:

• limiting the service charges, which your legal representative should advise you about;
• omitting management agency fees; or
• not including any closely associated inherent defects found within structures.

2. What Does It Include?

Once you negotiate with your commercial landlord about what areas your service charges cover, these will be reflected in your lease agreement. However, it is useful to know the typical areas a service charge may cover. 

Service charges in a commercial lease may consist of the cost of repairs and maintenance to shared areas, such as:

• stairs;
• lifts;
• corridors;
• meeting rooms;
• break out area;
• reception area;
• car park;
• gardens;
• roofing;
• drains;
• lighting; and
• equipment complying with legal requirements, such as emergency fire extinguishers.

Service charges will also likely include the following:

• building insurance;
• insurance of common parts;
• management charges where the landlord requires agent assistance for running the overall property or estate;
• cleaner; or
• gardener.

3. How Are Charges Calculated?

The method of calculating service charges can vary from lease to lease.

Many consider proportional service charge calculations to be a fair way to apportion service charges. However, it is essential to ensure your landlord does not leave you responsible for uncovered costs, for example, vacant commercial spaces in the building. 

You should also note that your service charges may have VAT added to them. This is like rent if your landlord chooses to place the property with HMRC.

Key Takeaways

If your lease agreement includes a service charge provision, understanding it is crucial. Your landlord imposes this fee to recover the expenses they have incurred in managing shared areas within a commercial property. As a tenant, it is important to know that you have the opportunity to negotiate the details of your service charge provision, including what expenses it covers. As leases will differ, so too will service charges, so you should carefully review what it covers, including the costs of maintaining gardens and lifts. Additionally, knowing how service charges are calculated is essential for anticipating costs in your lease. 

If you need help understanding service charges in a commercial lease, our 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.