In a lease, there will usually be a service charge provision enabling the landlord to recoup expenses from the tenant associated to the upkeep of the property. Service charges are what tenants, also known as leaseholders, pay to landlords to fund the costs of maintenance, repair and upkeep of the premises, and property management fees. The landlords are not permitted from making a profit from overstating service charges.
Disputing Service Charges
Both the landlord and tenant have a mutual interest to upkeep the property so that both parties do not commit a breach of the lease. However, the interests for the landlord and the tenant tend to be conflicted, which raises the scope for service charge disputes. Landlords will be looking to maximise the maintenance and upkeep of the property, and seek to recover all the costs from tenants. Whilst tenants, on the other hand, will be keen to exclude any costs which do not benefit them or their lease.
With commercial service charges increasing year-on-year, it is no wonder why commercial service charge disputes are common between landlords and tenants. Unexpected and constant increases in service charges can lead to significant outflows of a business.
A tenant can raise a service charge dispute if:
- The service charge is unreasonable or excessive
- The landlord is charging a service not covered in the lease
- The apportionment of service charge is unfair
- The services were not necessary or the work undertaken was not completed to a reasonable standard
Service Charge Obligations of Landlords
In comparison to residential properties, there is no statutory control to override commercial service charges. Instead, commercial landlords need to follow a code of conduct by the Royal Institution of Chartered Surveyors (RICS), which enforces standards and best practice in terms of fairness and transparency of service charges.
The key points are:
- The expenses the landlord wish to recover must be in accordance with the terms of the lease, and must not exceed 100% of the actual cost of the services
- Each year, tenants must be provided with a service charge budget outlining the planned expenditure, and a copy of the service charge account highlighting what was spent
- Landlords must notify the tenant how the service charge has been apportioned, to explain the proportion of the total service charge paid by each tenant
Service charge costs should be transparent so that tenants can see what is the service charge being spent on and how much is spent on each service. This allows tenants to assess whether the services paid for by the tenant are being put to good use and that the services paid are value for money.
Moreover, landlords have a duty of care to seek competitive prices, through obtaining and comparing different quotes, for the services required to upkeep the property.
In relation to the allocation and apportionment of service charge costs, landlords should ensure that tenants are being fairly charged in relation to their lease and property. If a tenant benefits more from a specific service then this needs to be reflected in the service charge apportionments.
If at any point the service charge budget needs to be adjusted then the landlord must notify tenants as soon as they see any foreseen material changes to the service charge budget. The landlord has an obligation to make the tenant aware and provide adequate notice of any changes to the service charge budget so that they can budget their finances accordingly.
Landlords have an obligation to tenants to ensure service charges are reasonable and are only payable by the tenant if the works carried out are up to a reasonable standard. There is no limit to the amount of service charge to be passed onto tenants, but the tenant is only liable to pay for service charges associated with their lease.
To prevent service charge disputes, there needs to be clear and transparent communication between the landlord and tenant. Landlords can reduce the number of service charge disputes from occurring by complying with the Code of Conduct as set out by RICS, but this does not necessarily mean to say that this will prevent any dispute arising.