Service charge disputes are a common form of dispute between landlords and tenants. In this guide, our commercial property dispute solicitors discuss the most common causes of service charge disputes and the potential remedies available to landlords and tenants.
What is a service charge?
A service charge is a mechanism within a commercial lease that enables a landlord 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 its tenants are conflicted when it comes to a service charge. It is obviously in a landlord’s interests to include as many of the running costs as possible within the remit 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 inherently 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 accordingly. This is a particular issue at the moment as a result of fluctuating utility prices for example.
Where several tenants occupy the premises, they will each 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. Common 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 any service charge provisions they wish. The key document in determining the expenses a landlord can recover as a service charge is therefore the lease itself often in detailed schedules to the lease.
The overarching 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 will be unable to subsequently recover the costs of those works.
Some leases contain so-called ‘sweeper clauses’, aimed at bringing additional items of expenditure not specified in the ease 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 construed by the courts.
Whilst the primary evidence of a tenant’s obligations is the lease, other factors will sometimes be taken into account 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 deem it 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 is no breakdown of the costs or an explanation as to why they have 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 considering a party’s position in the context of a disagreement. Regard must also be had to case law relating to service charge clauses. It is therefore 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 in the event of a service charge dispute. If your lease contains such a clause, its provisions must be adhered to; if you do not follow them, you may be in breach of the lease. Speak to us if you are unsure. Our expert commercial property solicitors can not only draft lease agreements, but they can also review the terms of your lease and will consider the effects of any dispute resolution clause, and advise accordingly.
When you are disputing service charges, it can be tempting to withhold payment pending resolution of the matter. It is important to note, however, 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 does not, non-payment may nevertheless 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, whereby you pay the service charge demanded but specifically state that you are doing so ‘without prejudice’ to your rights to dispute the service charges later, through legal proceedings if necessary. Timely legal advice is vital to ensure all correspondence with your landlord is phrased appropriately and you do not do anything to inadvertently jeopardise your position.
Whilst commercial service charges are not subject to statutory control, the Royal Institute of Chartered Surveyors (RICS) has issued a professional code aimed at improving standards and promoting best practice in respect of commercial service charges. Landlords are not bound by the code, but it offers useful guidance regarding what will be considered good practice in terms of service charges, and in the resolution of any service charge dispute. A key takeaway from the code is that litigation is actively discouraged. Instead, parties to a dispute are urged to seek resolution of their issues through alternative dispute resolution methods, notably Mediation or Independent Expert Determination. Our commercial property dispute solicitors will explain how each of these methods works and advise on their suitability to your case.
Service charge disputes are complex and depend heavily on the wording of the individual lease. Many leases impose time limits on tenants to raise any service charge objections. It is, therefore, crucial to seek legal advice as soon as you believe there may be an issue with your service charge. Our solicitors will review the terms of your lease alongside the case law, consider your position and advise on the best way forward.
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 primary remedy in service charge disputes is damages. For example, if you adopted a ‘pay now, argue later’ approach by paying the service charge and subsequently challenging it, the landlord will be obliged to repay the part of the service charge that was not due.
Sometimes, if the Landlord’s actions place them is 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 considers that damages would not be an adequate remedy. It can, however, 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 enable a tenant to assess their reasonableness.
Commercial landlord and tenant law is a complex area of legal practice. The outcome of a commercial service charge dispute hinges almost entirely on the provisions of the lease itself, which need to be interpreted with reference to case law. It is, therefore, 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 will review the lease, consider its terms alongside the relevant case law and advise on the appropriate course of action.
Once we have 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.