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

Commercial lease agreements are legally binding contracts, so you are responsible for complying with your lease obligations and respecting your tenant’s rights. However, when you and your tenant negotiate and draft a lease, you may have disagreements about the details of the lease provisions. As a landlord, one lease provision you must get right is the service charge provision. This allows you to recover the money you have spent on the property during your tenant’s occupation of your premises. This article will explain three key points a landlord should know about service charges in a commercial lease.

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Service Charge

If you lease out separate units within your property to various business owners, you may have a service charge provision in your lease. For example, you might own a large commercial building which is divided into individual offices or a shopping centre where you lease each unit as a shop.

A service charge allows you to charge your tenant a fee for looking after the shared areas in your commercial property. These are the areas your tenants commonly use and share rather than their own commercial premises.

Key Points

As a commercial landlord, you must fully understand the breadth of service charges to make the right decisions for your commercial property. Below we explain three key points you should know about service charges in a commercial lease.

1. What to Include  

The service charges in your lease account for the costs to maintain shared areas of your commercial property. Accordingly, you must ensure that your service charge provision accurately reflects this financial burden. It is critical your property is maintained well and appeals to prospective and current tenants. Therefore, you will want to make certain that you claim the costs you incur completing this through service charges.

Your service charge provision will include building insurance costs. Additionally, any agent costs you pay to manage your property will be covered through management charges for your commercial tenant.

As a commercial landlord, some retail tenants may attempt to negotiate that certain areas should not apply to their specific lease agreement. For example, a tenant on the ground floor may say that they should not pay to maintain the lift as they do not use it. However, it is wise to encourage tenants to think more broadly than this. Whilst they do not use the lift, its upkeep contributes to the overall building quality, which they enjoy and may impact their business.

2. Service Charge Dispute

In the event of a dispute with your tenant about the terms of your service charge, it is helpful for you to know what to do. Your lease agreement should have a common approach towards any disputes in your service charge provision. 

If you do not already have a way to approach disputes, a standard method is to allow a third party to help you and your tenant come to a resolution. If this does not work, you may refer it to a professional body for alternative dispute resolution.

3. Limits and Caps

Further, you might place limits and caps on your service charges. As a landlord, you cannot charge your tenants an unlimited amount of funds to maintain the property.  For example, if the commercial lease is short-term, you are unlikely to be able to request your tenant to pay costs and service charges for structural care. If you do, they could legally dispute this. 

Your tenant may want to apply caps to the service charge provision. This is to ensure that you do not set a fee over a prescribed amount of service charge each year. This will be in the commercial lease as an express cap. You should note that a cap is separate from a service charge amount, which you calculate as a fixed payment.

Key Takeaways

If you lease a larger commercial property, you will likely do so in divided units to several business owners as individual tenants. This means there will be common areas in the property the tenants use, such as lifts or the reception area. As the landlord, it is your responsibility to look after these areas. In doing so, you can impose a service charge from your tenants to cover incurred costs. Be mindful that your lease agreement clearly specifies what areas the service charge covers to avoid confusion or disputes with tenants. 

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.