Service charges are the most significant recurring cost a tenant is likely to face under a lease other than the rent itself. They relate to items of expenditure a landlord can incur to maintain or operate a property, which the landlord can then charge back in whole or in part to tenants.
Service charge costs are not reimbursed to practices (other than a discretionary limited top-up payment to contribute to full repairing obligations) so one of the key risks for practices entering into a lease is having a service charge that could suddenly become expensive.
The four tips below offer ways to control or reduce your service charge, with the help of your solicitor.
Negotiate a cap on the service charge
In commercial terms landlords may also be prevented from agreeing to a cap by their funders in order that the value of the asset is protected. However, a cap on service charge can be achieved in certain circumstances with robust negotiation and it is open to any tenant in a negotiation for a new lease to request one. Much will depend upon the bargaining position of the parties. For example, we have been able to agree caps with some NHS landlords in large urban areas entering into leases for two multi-let buildings with several GP tenants.
This was in part due to robust negotiations with the landlord’s professional advisors but was also influenced by the fact a number of practices were negotiating at once, and contracts for the maintenance of the property were being put in place with the landlord’s suppliers at the same time. The landlord was able to negotiate with third parties who would provide the relevant services for which the tenant would pay , to take into account the agreements he’d reached with the tenants, and set the maximum costs within the service provision contracts accordingly. As such, entering into constructive discussions with a landlord at an early stage may enhance the ability to secure an agreement for a service charge cap.
In another case we worked on, GP tenants were able to secure a cap with their landlord to incentivise the fact they could sign a lease quickly. The surgery in question had been vacant for some time and the landlord was under financial and commercial pressures to agree a lease as quickly as possible. Both the landlord and the would-be tenants wanted to overcome a number of hurdles that had prevented the leases from being entered into for a long time, so the GPs signed up to a longer lease period (after the landlord agreed to offer them lease breaks at specified times). As a result the service charges were fixed at a favourable rate for the GPs.
In the event that a cap is agreed, it is likely that the cap itself will be subject to an increase to offset the impact of inflation during the lease term. It is fairly common to see any cap linked to an inflationary rise by reference to an index such as RPI or CPI. Where the landlord is a commercial organisation, used to negotiating contracts, you may find that they discuss this option with you.
Know your obligations, and estimate what you’ll be charged
You should ensure you understand how these costs may increase during the term. Ask for detailed information as to the nature of the services that will be delivered, and that the mechanism for calculating of the cost to be clearly set out in the lease.
The financial uncertainty surrounding service charges stems from the fact that these costs tend to be variable unless steps are undertaken to try and fix or limit the service charge. A potential solution to this uncertainty, is to try and agree a service charge cap with the landlord. Landlords tend to be reluctant to be constrained by a service charge cap, as in the event of the cost of services being more than the cap they will be exposed to pay the balance.
Get a surveyor
GPs will find negotiations over the service charge easier if they are enable to engage a surveyor that specialises in GP premises. The surveyor looks at the obligations in a lease and places a financial value on them, offering advice on whether the costs are appropriate for the premises you are leasing. A surveyor works closely with the GPs’ solicitor to ensure that the documentation protects you as best as it can against unnecessary or inflated costs.
In particular your surveyor and solicitor will look to exclude or limit services where the tenant has limited use or benefit from them, for example when a surgery is located in a mixed-use development (such as part of a residential building) where it is common for service charges to benefit the other occupiers more than the GP tenants (such as charging GPs to offer concierge services in residential blocks).
Don’t pay for what you don’t use
GPs need to be careful when negotiating a service charge if they share a building with other tenants (such as a hospital or shopping centre) where others occupy and use the building outside the hours the surgery is open. Your solicitor can write appropriate exclusions around your service charge so that the practice does not pay for services that it doesn’t benefit from, and your surveyor will negotiate reduced costs based on the fact the GPs use the building for, say, 12 hours out of the 24 it is open.
Edwina Farrell is an associate at international law firm DAC Beachcroft.