Service Charge Provisions in a Lease
What is a lease?
In simple terms, a lease is a type of legal contract which sets out the agreed terms (covenants) between a landlord and tenant for the occupation of a property. The lease will include (among other things) who will do what and when, and perhaps even more importantly, who will pay for what and when. If applicable, the lease will also contain occupier’s service charge obligations in relation to the common parts fabric, plant and distribution services, together with soft FM and the accounting and management costs incurred by a landlord.
Does an occupier have to comply with the lease terms?
The short answer is “Yes”, and it should be noted that in the UK there is no overriding legislation.
The best time to challenge the inclusion of any lease provisions (including those involving service charges) is before signing. Once a lease is signed it takes precedence over everything else relating to the occupation of premises. If an occupier thinks the lease provisions are unfair after it has been signed, to the point of challenging it in Court, the Courts will not look favourably on commercial tenants if the lease made commercial sense at the time of signing (even if doesn’t make commercial sense now). An occupier cannot even rely on the RICS Professional Statement for help (which is accepted as the basis of “good estate management”) because the Professional Statement itself cannot “override the lease”. Therefore, if an occupier does not like the lease provisions they have signed, they must nonetheless comply with them under law.
Occupiers and their legal advisors are advised to seek assistance with appropriately qualified service charge consultants.
So, what can an occupier do if it considers the service provisions too onerous?
The answer is to review the service charge provisions carefully and find ways of reducing their impact. In most commercial leases, the service charge provisions are usually set out in a separate schedule or clause. However, interpreting service charge provisions is not straight-forward because additional factors need to be considered. For example, these could include:
- Apportionment – Is it a fair and reasonable proportion?
- Definitions – How are the premises, building and estate defined? Check plans too.
- Provisions for a fund – Does the lease provide for one? What type?
- Service Charge caps – Is there a cap which limits the tenant’s contribution to the service charge? Is it being applied correctly, or at all, does it conflict with service charge fund provisions?
- Lease term – This may have an effect on the interpretation of some of the provisions and exposure to significant costs.
- Is the landlord permitted to recover the cost of improvements?
- Do the service costs need to be fair and reasonable?
- And so on……
Whilst there have been attempts to produce a universal commercial lease, that has not been achieved, and there are often significant differences between leases, even concerning occupancies within the same building.
Since the average lease term has reduced and given current topics such as carbon footprint and ESG, it is even more important to ensure that lease terms are appropriate, understood and not open to alternative interpretation.
