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Six key questions on service charges

Adam Thompson answers six key questions on service charges - what they are, how they fit into lease agreements, Tenancy at Will agreements, and avoiding being overcharged for bills.

What's in a service charge? 

A service charge is levied in respect of services and utilities that are provided by the landlord.  This is commonplace where a building has more than one occupier, so the landlord is providing services in respect of the entire building and is then apportioning the costs between the various tenants/occupiers.  This may apply to such areas as internal hallways including an entrance lobby, the structure of the building (e.g. maintenance of the roof) as well as external areas including car parking and landscaping.

A service charge can also include the landlord's costs in administering and calculating the service charge. 

How do I negotiate a service charge?

A service charge should be transparent and readily justifiable.  The service charge can be challenged by the tenant and the landlord should be able to justify the costs incurred.

Sometimes there may be significant amounts of capital expenditure expended by the landlord, such as refurbishing of common parts, re-surfacing the car park or providing a new roof.  In advance of these costs being incurred it is good estate management practice for such repairs and costs to be discussed between the landlord so that both parties are aware of the need for the work to be undertaken and the tenant can then budget for the increase in service charge accordingly.

What happens if I don't have a clear written lease agreement?

Without a written lease agreement the terms of what the tenant is responsible to repair and what the landlord is responsible to repair are not itemised nor are the provisions of the service charge.  In such situations, the tenant may well be in occupation by way of a Tenancy at Will but this will not go so far as to state the terms of the service charge.  It is, however, reasonable for the landlord to pass onto the tenant his reasonable costs in looking after the premises. 

The Royal Institution of Chartered Surveyors has issued a Service Charge Code of Practice, which has been developed with leading property bodies to improve standards and promote consistency, fairness, transparency and best practice of the management and administration of service charges in commercial property.  Without a lease agreement being in place, the service charge being administered by the landlord should be accordance with this Code of Practice. 

If I share my premises with PCT staff, should they be part of the agreement?

The service charges in respect of the costs of the overall entity of the building with those costs then being shared by the tenants on a pro rata basis according to their occupation of the building.  It follows that the PCT (or their successors) should be bearing the cost of this service charge in relation to their part of the premises. 

What is a Tenancy at Will Agreement?

A Tenancy at Will occurs when there is not a formal lease agreement or when there has been a formal lease agreement but it has expired with the tenant remaining in occupation.  An important aspect of a Tenancy at Will is that the property owner has permitted the tenant to be in occupation and is where the landlord has agreed to allow the tenant to stay at the property without a valid lease.  Without there being a written agreement, the payment of rent may be more lax and other obligations, such as repair to the property, may also be more informal. 

How do I make sure I am not being overcharged for heating and cleaning costs?

The items with a service charge should be unambiguous between the parties and the landlord should be able to justify the costs that he has incurred.  The costs the landlord is seeking to recover should be justifiable and an audit trail should exist allowing the tenant to be satisfied as to the accuracy and reasonableness of the service charge.

Adam Thompson is a chartered surveyor with Primary Care Surveyors, and was quoted in our story on lease reviews in January

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