A service charge is your proportion of the cost of running the shared elements of a building. In buildings that have a number of tenants, the landlord will often retain responsibility for the elements of the buildings that are used by all tenants eg. the building structure, communal areas, and equipment such as lifts. The service charge to the tenants allows the landlord to recoup the costs for operating, maintaining, repairing and renewing these aspects of the building. For further information, please visit the Service Charge section of our web resources.
In certain circumstances, disputes may arise as to the payment levied by the landlord. How do you stop the landlord charging you extortionate amounts for the maintenance and improvement of his building?
Before signing your lease:
Choosing your property carefully prior to signing your lease can help to decrease the potential for future issues. Choosing well maintained, well managed buildings with low potential future costs will provide some security against large service charge bills. Ask to see the last three years service charge accounts to understand where money is being spent.
A low annual service charge will not always be a positive, as problems may have been ignored and be storing up for the future. Speak to tenants in the building and find out if they have grievances or particular concerns with the expenditure or the managing agent.
Certain steps could be taken at the outset of negotiating a lease to minimise the risks of an unwelcome service charge demand, such as:
- a schedule of condition of the property;
- a cap on service charges being agreed either in the lease or in a side letter
- an undertaking by the landlord to carry out certain works before completing a lease agreement (known as an “Agreement for Lease”) and to exclude the cost of those works from the service charge.
Implementing these protective measures at the beginning of the lease helps avoid nasty surprises further down the line. In the case of a service charge cap it also provides a level of certainty as to your maximum liability for service charge which is helpful when undertaking future budgeting.
Click here for information and guidance on how to go about negotiating the terms of your lease and ensuring adequate protection against such increases.
During your lease:
Once you have signed a lease, your service charge is governed by the terms in your lease. There are steps you can take to begin to address service charge disputes with your landlord or their managing agent:
- Investigate the service charge demand - Look into the history of service charges: what have demands in the past been? Did these include an element towards a sinking fund (thereby contributing towards major works)? Has there been consultation or discussion about the works? Can you afford them? Do they appear reasonable given the remaining term of the lease?
- Check how the demand was issued - Is there something in the machinery of the service charge demand which has been misconstrued: is the demand in the right form, or at the right time, or in respect of the right works (all of which need to be checked in the lease)? Service charge provisions are often very obscurely drafted, so if you cannot make sense of it that might not be your fault. Who do you know who might be able to interpret it? A solicitor or surveyor should be able to provide guidance on this. For details of professionals or pro bono organisations, please contact our Property Advice team
- Look for ways to resolve the dispute - Is there a dispute resolution clause within the lease whereby any problems with the demand for payment should or could be referred to a third party? If so what are the time limits for doing so: there probably are some time limits and they might be strict, i.e. if a referral to a third party such as an independent expert or arbitrator is not made within the required time then the right to challenge the service charge has been lost.
Open up a dialogue with the landlord or its agents. It is far more likely that the problem will be resolved by direct discussion between the parties than through formal legal channels, although it might help your negotiating position to come across as well-advised about the legal implications. Therefore support from our Property Advice team or a professional may prove useful.
You may also receive some support from current best practice guidelines. RICS “The Code of Practice on Service Charges in Commercial Property”
sets out useful guidance on best practice in managing a service charge. Even if there are landlords for whom best practice is not something which they aspire to managing agents will perhaps be more wary of abusing the provisions of the Code as compliance with it affords some, but not complete, protection from a complaint of negligence.