What you should know about Service Charges in commercial leases

July 24, 2017
Business law Commercial law

Anyone considering renting part of a commercial property should be aware of potential Service Charges and how they may affect their tenancy. Tallents Solicitors explain what Service Charges might be included in your lease and what you need to know when negotiating with your potential landlord.

So, what are Service Charges?

Many commercial leases will refer to Service Charges. These are costs incurred by the Landlord for running and maintaining shared parts of the building or estate, which the landlord can charge back to tenants.

Tenants will be responsible for all the Service Charges as outlined in their lease so it definitely will pay to make sure that you understand what you are responsible for so as to avoid a financial surprise in the future.

Service Charges can include:

• Maintenance and repairs to shared areas, such as common stairwells and corridors. Tenants should note that this might also extend to areas outside the building, such as roofing and drains.
• Building insurance.
• Management charges to cover the fees of the landlord’s agents in connection with running the property or estate.

How are Service Charges calculated?

The charges are usually calculated in one of two ways:

• Fixed – these will be a set percentage of the total anticipated service charges for the entire building.
• Proportional – these will be based on the area of the tenant’s unit as a proportion of the total area of all the units.

It’s important to note that:

Although proportional Service Charges are the fairest way to apportion the costs, we also advise our clients to ensure that they are not liable for any additional costs if there are vacant units and that the landlord is liable to cover any shortfall in that instance.

It’s become increasingly common for Service Charges to include costs for shared services, such as a cleaner or gardener or to maintain a lift. This will apply even if they live on the ground floor and might never use the lift. However, tenants should take a broader view of the property and accept that some charges, although they do not directly benefit from them, will maintain both the quality of the property and attract future tenants.

The landlord may also wish to ensure that the Service Charge clause is drafted broadly to cover a variety of charges in relation to the building, especially if the property is in a sought-after location and tenants are plentiful. However, if the property is in a less desirable area then there is likely to be more room for negotiation on the tenant’s side.

Limiting Service Charges

It is possible to limit Service Charge in certain circumstances. This needs to be negotiated at the initial stages before heads of terms are agreed. You need to take advice from us at an early stage so we can outline what you should avoid and how to avoid it.

Take legal advice to fully understand Service Charges

There will always be a balance to be struck between landlords and tenants when drafting commercial leases, so it is key that both parties understand how the Service Charge provisions will work and how best to protect their interests.

Tallents’ commercial property department has experience in advising both landlords and tenants regarding all aspects of commercial lease negotiations and the landlord and tenant relationship. In the event of a dispute then our specialist litigation solicitors can help guide clients through the process. For more information, please contact us at any of our offices.

calculating service charges commercial law commercial leases landlords limiting service charges service charges service charges in commercial leases tenants what are service charges
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