Service charge disputes are a common form of dispute between landlords and tenants. In this guide, our commercial property dispute solicitors discuss the main causes of service charge disputes and the potential remedies available to landlords and tenants.
Contents:
- What is a service charge?
- What expenses can a landlord recover as a service charge?
- Common causes of service charge disputes
- Can a tenant dispute a service charge?
- What is a reasonable increase in service charges?
- Can tenants challenge service charges that are based on estimated amounts rather than actual costs?
- Remedies for service charge disputes
- Summary
What is a service charge?
A service charge is a mechanism within a commercial lease that gives a landlord the power to recover the costs of maintaining the shared aspects of the premises from the tenants who occupy them. Service charges are commonly used to cover expenditure incurred in connection with matters such as cleaning, repairs, insurance, lighting and heating.
Often, the interests of a landlord and their tenants are conflicted when it comes to a service charge. It’s obviously in a landlord’s interests to include as many of the running costs as possible within the scope of the service charge and keep the majority of the rent as profit. Tenants, on the other hand, will want to limit the extent of works listed as being included in the definition of a service charge, and tie up as much as possible within the rent. As a result, service charge clauses are often fiercely negotiated.
The basis upon which the service charge will be calculated is set out in the lease. Sometimes, a lease will specify a set amount to be paid by the tenant as a service charge each year throughout the tenancy. This is known as a fixed service charge. A fixed service charge has the advantage of providing certainty to the parties but is essentially inflexible and can lead to perceived unfairness if the landlord’s costs increase or decrease. Variable service charges, on the other hand, are directly tied to the actual costs incurred by the landlord in the running of the property. This is the more common method of calculation and is often considered fairer, but tenants should be aware that the level of service charge may increase significantly over the course of their tenancy, and they should budget for this. This is a particular issue at the moment as a result of changeable utility prices, for example.
Where several tenants occupy the premises, each of them will be liable to pay a proportion of the overall service charge. Again, the mechanisms for the calculation of each tenant’s proportion will be stated in the lease. Usual bases of calculation include fixed or fair proportions, or a proportion based on the tenant’s occupied floor space e.g. if a tenant occupies 30% of the floor space, it should pay 30% of the service charge.
What expenses can a landlord recover as a service charge?
Unlike the position in residential leases where service charge provisions are subject to strict legal regulation, the parties to commercial leases are generally able to agree to any service charge provisions they wish. The key document in determining the expenses a landlord can recover as a service charge is the lease itself – often in detailed schedules to the lease.
The main principle is that a landlord can only recover the cost of items and works stated in the lease as being those for which a service charge can be claimed. A tenant will usually only be contractually obliged to contribute towards the repair and maintenance of the premises, as opposed to any refurbishment or improvement works. Some leases require the landlord to obtain the tenant’s permission prior to undertaking major works; if they fail to do so, they’ll be unable to recover the costs of those works further down the line.
Some leases contain so-called ‘sweeper clauses’, aimed at bringing additional items of expenditure not specified in the lease into the service charge. Whilst these clauses can operate to allow a landlord to recover the costs of unspecified works, they tend to be narrowly interpreted by the courts.
Whilst the primary evidence of a tenant’s obligations is the lease, other factors will sometimes be considered by the court. For example, the length of a tenancy may be relevant when considering what the tenant should pay; if a tenant has only a short-term interest, or the tenancy is almost at an end, the court may say it’s unreasonable to expect them to pay for extensive remedial works such as a replacement roof. Instead, their liability may be limited to the cost of making minor repairs.
Common causes of service charge disputes
Some of the most common causes of service charge disputes include the following:
- The service charge seems excessive or unexplained.
- A lack of transparency; for example, there’s no breakdown of the costs or an explanation as to why they’ve been incurred.
- Excessive administration or management fees.
- The standard of work or provision of services is poor.
Can a tenant dispute a service charge?
Yes, there are situations in which a tenant can dispute a service charge. In fact, service charges are a common area of dispute between landlords and tenants.
Disagreements regularly arise over matters such as the scope of works a tenant is obliged to pay for, the reasonableness of the service charge and whether the works in question fall within its scope. Since there is no statutory framework governing commercial service charges, detailed consideration must be given to the provisions of the lease when weighing up a party’s position in the context of a disagreement. Regard must also be had to case law relating to service charge clauses. It’s vital to seek legal advice from specialist commercial property dispute solicitors as soon as a disagreement arises. They will assess the merit of your position and advise on the best course of action.
Many leases contain dispute resolution clauses detailing the procedure to be followed if a service charge dispute arises. If your lease contains a clause like this, its provisions must be followed; if you don’t follow them, you may be in breach of the lease. Speak to us if you’re unsure. Our expert commercial property solicitors can not only draft lease agreements, but they can also review the terms of your lease and consider the effects of any dispute resolution clause, and advise you of the best way forward.
When you’re disputing service charges, it can be tempting to withhold payment until the matter is resolved. It’s important to note, that doing so may place you in breach of the terms of your lease. Many leases expressly prohibit the tenant from withholding service charge payments but, even if yours doesn’t, non-payment may still constitute a breach. This could result in your landlord issuing court proceedings for your failure to pay, or even forfeiture of the lease i.e. to take back possession of the premises, the effects of which can be disastrous. In some cases, a ‘pay now, argue later’ approach might be best, where you pay the service charge demanded but specifically state that you’re doing so ‘without prejudice’ to your rights to dispute the service charges later, through legal proceedings if necessary. Well-timed legal advice is vital to ensure all correspondence with your landlord is phrased appropriately and so you don’t do anything to jeopardise your position by mistake.
What is a reasonable increase in service charges?
The law doesn’t give a definition of what’s reasonable and so in turn there’s no concrete guidance on what makes for a reasonable increase in service charges. If as a tenant you’re of the opinion that a service charge increase is unreasonable, you can request a breakdown of the costs from the landlord to check if it justifies the increase and you can again potentially ask the First-tier Tribunal to assess the reasonableness of it based on all the evidence available. Whilst increases may sometimes be unavoidable because of factors such as inflation and ever-rising utility costs, a tribunal will decide if they’re proportionate and can be justified with reference to the information that’s put before it by the landlord in support of the increase.
Can tenants challenge service charges that are based on estimated amounts rather than actual costs?
The law gives tenants the right to challenge estimated service charges when they don’t believe that they’re reasonable, or are somehow unfair or inaccurate. A landlord might provide estimated charges at the start of the financial year based on what they believe the costs might be with a view to possibly adjusting them later on – what should happen in relation to this will be set out in the terms of the lease itself.
If you feel that the estimated service charges are unfair or incorrect, or if the landlord has estimated for work they haven’t actually carried out, you can make an application to the First-tier tribunal (Property Chamber) for them to make a decision on the reasonableness of the estimated charges.
Remedies for service charge disputes
The remedies available if your service charge challenge succeeds will depend on the individual circumstances of the case and the provisions of the lease. The main remedy in service charge disputes is damages. For example, if you adopted a ‘pay now, argue later’ approach by paying the service charge and then challenging it later, the landlord will be obliged to repay the part of the service charge that wasn’t due.
Sometimes, if the landlord’s actions place them in breach of the terms of the lease, the court may make an order for ‘specific performance’, forcing the landlord to honour its obligations. This type of order is usually only made when the court believes that damages wouldn’t be an adequate remedy. It can be useful in cases where, for example, the landlord has failed to comply with an obligation to provide a breakdown of service charge costs to allow a tenant the opportunity to assess their reasonableness.
Summary
Commercial landlord and tenant law is a complex area of legal practice. The outcome of a commercial service charge dispute hinges entirely on the provisions of the lease itself, which need to be interpreted with reference to case law. This means it’s extremely difficult to generalise as to the likely outcome of such disputes and you should seek advice from an experienced property disputes solicitor as soon as you become aware of an issue. They’ll review the lease, consider its terms alongside the relevant case law and advise on the appropriate course of action.
Once we’ve helped you resolve your dispute, our commercial property team can help you future proof your business by drafting, reviewing or negotiating any new agreements on your behalf.
