Service Charges on Commercial Properties

By Sarah Secker

What are the key points to consider in relation to service charges for commercial premises?

A service charge is appropriate in a commercial lease when the tenant will use parts of a building in common with other occupying tenants. Common parts may be, for example, parking areas, entrance halls, communal plant and service media and the structural and external parts of the building.

The landlord will provide services which will typically be maintenance and repair of the building, provision of heating, lighting and water, fire-fighting equipment, landscaping, maintaining lifts and boilers.

The landlord’s objective is to recover all of its expenditure on the building from the occupying tenants. Sometimes a tenant may negotiate a service charge cap so that it cannot be charged any more than a specified amount in any year.

Each tenant will pay a fair proportion of the total cost to the landlord of providing the services. This is usually calculated as the proportion of the tenant’s floor area of the building in relation to the total floor area of the building.

Where regular maintenance to the common parts is required, service charge payments are usually payable by the tenant by equal quarterly estimated payments in advance. At the end of the service charge year there will be a reconciliation of the estimated payments and the actual expenditure.

The landlord must prepare service charge accounts detailing the actual expenditure for the year and have them certified by an accountant. A service charge budget must be issued annually to all tenants.

Alternatively a landlord may simply include an obligation on the tenant to reimburse a fair proportion of the landlord’s costs on demand as and when repair and maintenance works are required.

The Royal Institution of Chartered Surveyors (RICS) has published “Service Charges in Commercial Property” setting out the professional standard for the management and administration of service charges and provides mandatory obligations for RICS members and regulated firms. A copy is available at www.rics.org.

There is a different regulatory framework for service charges in the residential property sector.

These are general principles and each individual arrangement should be individually checked. Contact Sarah Secker at the Commercial Property Department at Sampson Coward on 01722 410664 for more information and advice.

Sarah Secker