Commercial leases: a guide to service charges

What are service charges?

As the name suggests, service charges are levied upon tenants by landlords for certain services. Service charges are charged in addition to regular rent payments. The intended purpose of a service charge is to cover the landlord’s costs of managing the property.

The size, number of occupants, and intended use of a commercial property can dictate the need for and importance of service charges. For example, large multi-use properties are more likely to have significant costs related to upkeep than smaller properties with single occupants.

Services charges can work in several ways. In some cases, tenants pay the landlord a flat, pre-negotiated fee in exchange for certain services, such as the maintenance of shared facilities. In other cases, landlords will provide services as and when needed, and then once the service has been provided, the tenant will be obliged to pay for them. This type of agreement is more likely to cover services such as cleaning and gardening rather than more critical services such as structural maintenance.

What do service charges pay for?

Service charges can cover a wide range of services. These will vary from lease to lease and from property to property. With that in mind, here are some typical services that one might see covered under the service charges in your commercial property lease:

• Cleaning of common areas
• Repairs to common areas
• Maintenance and upkeep of fire extinguishers and other emergency equipment
• Insurance of common parts
• Maintenance of outside areas (paths, roads, gardens)
• Lighting
• Lifts

In addition to these common services, most commercial leases will include a provision allowing the landlord to provide any additional services they deem necessary. Suppose tenants are wary of such a clause. In that case, it is advised that a level of “reasonableness” is required to be demonstrable by the landlord prior to any works being carried out that could lead to disputes between tenant and landlord.

Tenants may wish to have certain items excluded from the service charge, though they may still require these services to be provided in some cases. These may include:

• Costs relating to structural defects
• Lost income resulting from empty units in a structure
• Upfront costs of developing the commercial property
• Management agent fees
• Breaches by the landlord

How are service charges calculated in a commercial property lease?

Service charges will usually be calculated as either fixed or proportional. Fixed service charges are a set percentage of the anticipated total service charges for the entire building or property. Whereas proportional service charges are calculated by working out what proportion of the total area of the building or property the tenant’s unit covers.

Although proportional service charges may seem to be the fairest way to divide costs amongst tenants, as a tenant, it is important to ensure that you are not liable to cover the expenses attributable to any vacant units.

It has become increasingly common for service charges to be used to cover the costs of services which tenants share. Services such as gardeners, cleaners, and maintenance staff (who may maintain lifts, for example) are shared services for which landlords may charge all their tenants. It is essential, therefore, to carefully study the service charge clause of your tenancy agreement, as these clauses can be extremely broad or extremely specific and vary from case to case.

If you wish to limit the service charges you are liable for, it is advised that you seek the advice of a commercial solicitor as early as possible in the commercial leasing process.

Contact SO Legal’s expert commercial solicitors today

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