There is no getting away from it.  Service charge is a necessary evil. Whilst, expensive for most retailers, all would probably agree that it is a sensible way of dealing with the services provided by landlords.

The problem with service charge

Whether you are a tenant in a shopping centre, retail park or any other type of multi-let building virtually all leases contain service charge provisions.  These provisions allow a landlord to recover the costs it incurs in providing services to that property in addition to any such other services of which you, as tenant, have the benefit.

At a time when all businesses are trying to keep an eye on costs and reduce budgets where possible, tenants often find that they have little control over what is included in the service charge, let alone whether it is necessary.  In fact the whole process can come across as a bit of a mystery.  The result?  An increased demand for transparency in the service charge process.

A potential solution?

The second edition of the RICS Code of Practice for Service Charges in Commercial Property (the “Code”) came into effect on 1 October 2011. It builds on the first edition’s core principles to provide “best practice” promoting communication between parties, transparency and timeliness. 

The Code affects landlords, tenants, managing agents and their respective representatives.  Parties are encouraged to draft all new leases in line with the Code’s principles and, although the Code cannot override existing leases, to read the terms of any such lease in conjunction with the Code.  With this increased transparency comes the hope of fewer disputes.  The Code promotes occupiers rights of challenge stating that all future leases should have Alternative Dispute Resolution clauses that allow parties to settle service charge disputes cost-effectively.

Whilst is it is not mandatory, it should be noted that if an allegation of professional negligence is made against a practitioner, the court is now likely to take into account any relevant guidance notes and, if appropriate to the circumstance, whether the practitioner has followed them.

Some other options to consider

As the Code is not law, tenants cannot be certain their potential landlord will comply with it.  With this is mind, below are some further points that a potential tenant should consider when taking a new lease:

  • ensure that you have seen the service charge accounts for at least the past three years and the current year’s service charge budget.  Are there any discrepancies? If so, try to get an explanation;
  • check the level of service charge at comparative sites and locations;
  • try to agree a service charge cap to allow you some control over budget;
  • enquire whether your potential landlord complies with the Code;
  • when negotiating the form of lease, even if the landlord insists that the service charge provisions are in a standard form, try to include some specific exclusions to the service costs.  For example, cost relating to:
    •  any works that have been carried out prior to occupation;
    • the collection of rent arrears and enforcing the terms of other individual tenancies;
    • any additions to the building except where such works are carried out for the purpose of the renewal or replacement of existing items;
    • any unlet lettable area which would be the direct responsibility of the occupier if it were let.

…and on a seasonal note!

Watch out for obligations to pay for the costs of seasonal decorations and even the odd appearance of Father Christmas.  Whilst these might be costs you feel you could do without and may be challengeable, the increased footfall might act to your advantage!

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