How to take the heat out of Service Charges

If there is one thing most likely to cause friction between landlords and tenants, it’s service charges.

 Service charges are used in multi-tenant buildings, both commercial and residential, to share costs relating to the upkeep of the whole building. They will usually cover things like building insurance, general repairs, planned maintenance, heating, lighting and cleaning in common areas, window cleaning and so on.

 In doing so, service charges help to set out the various rights and responsibilities for who does, and pays for, what in a multi-tenant building. If it isn’t set out in the service charge terms, the tenants will usually be responsible for it.

 But negotiating what is and is not covered, and what all parties consider a fair rate for so many different services, is tricky, and is further complicated by a range of statutory regulations.

 Wherever there is a lack of clarity between two parties, there is always room for dispute. So here is a quick guide to avoiding any grey areas and reaching a service charge agreement which keeps everyone happy.

What the law says

Service charges have emerged as a knock-on effect of various pieces of tenancy and leasehold law. Landlords are legally obliged to provide certain services, such as building maintenance and health & safety compliance testing and assessment. But the law also makes allowances for certain of these costs to be passed on to tenants, in the form of agreements made as part of the leasehold.

A landlord is also allowed to alter what they charge without limit. However, the legal test for this is that the change must be ‘reasonable’. A landlord must be able to demonstrate it is reasonable by providing documentary evidence on request showing how charges relate to expenditure.

 Arguments over what is and is not reasonable is the source of many disputes over service charges.

The tenant’s perspective

Service charges are a legitimate way for landlords to recover genuine costs they incur from provisioning a property. But from the tenant’s perspective, they are another added expense on top of rent and rates. And as with any costs, tenants want stability, clarity and value from what they have to pay.

 Too often, they don’t feel they get any of these things. The practice of including fixed service charges in the lease has mostly died out, as landlords want the flexibility to adjust charges in line with changing requirements. This makes it hard for tenants to budget for service charges. And because of the complexities of collating lots of different expenses into one, tenants often complain that they do not know what they are paying for, and therefore feel they are getting a bad deal.

Making service charges work for all parties

Good communication is essential to avoiding controversy with service charges. Given the fact that tenants are looking for clarity in what they pay for, and landlords are legally obliged to provide it anyway, it is good practice to start off on the right foot and make explanation and discussion of service charges a key focus during lease negotiations or renewals. When revising service charges for the next financial period, landlords should be prepared to make a sound business case and negotiate.

 Given the complexities and sensitivities, it is also strongly advised to seek assistance from a third-party specialist. A professional property management service will take care of structuring negotiations and resolving any disputes, saving huge amounts of time and, in many cases, money. They will also handle the administrative side, including keeping accurate accounting records, collecting payments, reviewing service contracts and tenders to get the best value, and also ensuring statutory compliance.

For more information about Fairhurst Buckley’s Commercial Property Management services, please contact Jason Burke on 0161 476 9487.