Service Charge Disputes – What Retail Tenants Need to Know

Service charges are a contractual element of commercial leases; set by the landlord, they dictate the tenant’s financial contributions towards maintaining the premises. The current retail market, where supply outstrips demand, has caused landlords to invest more in their properties to attract retailers, but the cost of these improvements is then being passed onto existing tenants through the service charge. This is leading to an increasing number of disputes – so what can a retailer do?

Firstly, it is normal and fair for service charges to cover building services including maintaining common areas, gardens, parking areas, air-conditioning, lifts, central heating, and providing security and cleaning staff. In normal circumstances, the contribution stated in the lease is calculated based on predictions of how much work will be needed to keep the building in a good state of repair. The charges are then recalculated annually to reflect the actual expenditure incurred. If the costs are greater than the agreed amount, the tenant is liable to pay the difference, which is not usually significant.

There is, however, a big difference between keeping a building in a good state of repair and undertaking refurbishment works, which can lead to large and unexpected bills at the end of the year. Tenants who are being faced with such bills are starting to question why they should contribute to help a landlord upgrade its stock and secure higher rental values.

The good news is that there are a number of valid reasons to dispute a service charge – a tenant’s lease may be due to expire soon and they won’t benefit from the building improvement works, or a tenant might lease a smaller office space and does not feel the division of costs reflects this. But the tenant will be challenging a landlord who has much to gain from passing on liability and entering claim procedures like these can be lengthy and complicated, and in extreme cases, can end up in court – but it doesn’t need to escalate to this level.

We would recommend that the first step for tenants is to instruct a Condition Review as soon as they have any concerns about building improvement works and the subsequent service charge payments. This will evaluate the scale of the building works and consider what is regarded as necessary work and what can be seen as cosmetic. These findings are then assessed against tenants’ individual leases, taking into consideration the length and value of leases. The result is an independent report that examines the extent of a tenants’ liability and enables more effective negotiation with landlords.

Another way to reduce the likelihood of unexpected service charge hikes is to interrogate the service charge clause in the lease thoroughly before signing. Monitoring the service charge changes throughout the course of the lease is also important and all queries should be raised with the landlord as they happen – don’t wait to be hit by charges as negotiation is much harder at this stage.

In a tenants’ market, you have scope to negotiate but, as with everything, prevention is better than cure. If it’s too late for that, swift action and good evidence are key to a successful outcome.