Service Charges in Commercial Property Explained

February 21, 2023

For commercial landlords and tenants, service charges are an essential issue to get right as they are one of the most common areas of dispute. They must be set at an appropriate level, each party must fully understand what they cover and there should be a clear process for resolving any problems that arise.

In this article, we will cover:

• What are service charges?
• What do service charges cover?
• How are service charges for commercial property calculated?
• How service charges are divided between multiple tenants in a building
• How are service charges for commercial property paid?
• Can service charges be capped?
• Can tenants dispute service charges?
• What happens if a commercial tenant does not pay service charges?

While we want this article to be helpful, it should not be taken as legal advice. If you would like help with service charges for commercial property, our commercial lease experts will be happy to support you.

To speak to one of our experts, please call us on 01452 522047 or request a call back and we will contact you shortly.

What are service charges?

Service charges are recurring fees a tenant must pay to their landlord as part of the terms of a lease. These charges are intended to cover the landlord’s costs for managing the property being leased.

The service charges must be specified in the lease agreement, including how much they are, when they must be paid and what they cover. Payment of the service charges is a legal obligation on the tenant as part of their lease.

What do service charges cover?

Exactly what service charges for commercial property will cover will depend on the situation. Typical maintenance costs a landlord might try to recoup through service charges include fees for:

• Cleaning and maintaining communal areas
• Repairs to structural parts and common areas
• Providing fire safety equipment to common areas
• Insurance for common areas
• Staff e.g. receptionists and security

As stated above, exactly what the service charges for a commercial property cover should be clearly set out in the lease agreement.

How are service charges for commercial property calculated?

Ideally, the lease should detail how service charges are calculated, but this is not always the case. It is always a good idea for both sides to agree clearly upfront in writing how service charges will be calculated as this can minimise the risk of disputes later.

There are different approaches that can be taken to determine what the service charges for a commercial property should be. The most common approaches are:

Fixed service charges

A set amount will be specified in the lease agreement to be charged each year until the lease expires. If the lease is extended, the set amount might then change to reflect the landlord’s current costs. The advantage of this approach is that it gives both sides certainty over costs, but it also doesn’t leave any flexibility for situations such as if the landlord’s costs increase or decrease.

Variable service charges

The service charges will be directly determined according to the landlord’s costs. This is seen by some as a fairer approach as it means what the tenant pays is tied to the actual costs of the services being provided. However, it does mean the cost of service charges can increase significantly over the course of a tenancy if the landlord’s costs go up.

How service charges are divided between multiple tenants in a building

For buildings with multiple tenants, the landlord’s costs will be divided amongst them. This might be a straight split (e.g. if there are four tenants, they each pay a quarter) or the split might be determined by each tenant’s share of the total floor space, how much each tenant benefits from shared resources or according to other factors.

How are service charges for commercial property paid?

Service charges for regular, ongoing costs (e.g. cleaning), will usually be paid monthly or annually. Charges to cover one-off costs may be paid as and when services are provided or they might be covered from a sinking fund, which tenants will need to contribute to on a regular basis.

Can service charges be capped?

Yes, tenants can ask for the terms of their lease agreement to include a cap on any service charges, but the landlord does not necessarily need to agree to this. In some circumstances parties may also agree limits on what a landlord can recover e.g. for short term leases, there may not be limits to what a landlord can charge their tenant for major structural work so this may need to be addressed.

Can tenants dispute service charges?

A tenant may seek to dispute a service charge if they feel it is not proportionate to the services provided. The lease should include provision for resolving service charge disputes, with the most commonly specified approach being to retain an independent expert such as a surveyor to determine what a fair service charge would be.

If you are a tenant who wishes to dispute a service charge or a landlord facing such a dispute, it is strongly recommended you seek expert legal advice at the earliest possible stage. This can significantly boost your chances of achieving an amicable resolution that protects the landlord-tenant relationship, as well as helping to avoid the potential expense and hassle of court proceedings.

What happens if a commercial tenant does not pay service charges?

Tenants cannot simply refuse to pay service charges, even if they feel they are unfair. This could constitute a breach of the terms of their lease and could mean the landlord has the right to end the lease.

If a tenant is unhappy about their service charges, they should always seek expert legal advice to help communicate their concerns to their landlord.

If the dispute cannot be immediately resolved, one option for the tenant is to pay their service charge, but give their landlord notice that they are paying “under protest”. This helps to establish that they disputed the charge while avoiding the risk of legal action from the landlord. This can be an important step in a dispute as simply paying the fee could be construed as accepting its legitimacy, which could undermine the tenant’s case.

Contact our commercial property solicitors in Gloucester

Do you need help with commercial property service charges in Gloucester, Cheltenham, the Forest of Dean or across Gloucestershire?

Speak to one of our experts now by calling us on 01452 522047 or request a call back and we will contact you shortly.