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Service charges can represent a substantial additional cost of occupying commercial premises and are a frequent source of disputes between landlords and tenants.
We advise commercial tenants, landlords and managing agents on disputes over what can be charged, how expenditure has been allocated, major works, management costs and whether particular expenditure falls within the service charge provisions of the lease.
The starting point is usually the lease. Unlike rent, there is no single standard service charge arrangement and what a landlord can recover depends heavily on the wording agreed when the lease was granted.
We have a specialist property disputes team experienced in commercial landlord and tenant disputes, supported by a large commercial property practice.
That combination is particularly useful with service charge disputes. They often require detailed interpretation of the lease alongside an understanding of the wider commercial relationship between landlord and tenant.
We act for both commercial landlords and tenants, including businesses occupying offices, shops, industrial and warehouse premises and other commercial property.
Our property disputes team is mainly based in our large Central London office at Carter Lane, with lawyers and offices across England and Wales.
Commercial service charge disputes can concern both whether expenditure is recoverable at all and how much a particular tenant should be required to contribute.
Common issues include:
whether particular expenditure falls within the service charge provisions;
substantial increases in annual service charges;
major repairs and refurbishment projects;
replacement rather than repair of parts of the building or its equipment;
improvements which a tenant argues go beyond the landlord's repairing obligations;
management fees and professional costs;
expenditure on common parts and shared facilities;
allocation and apportionment between different tenants;
sinking and reserve funds;
services which have not been provided or are inadequate;
service charge caps and exclusions;
historic service charge liabilities; and
unpaid service charges and recovery action.
The sums involved can become significant, particularly with larger premises or where major structural works, roofs, lifts, mechanical systems or refurbishment of common areas are involved.
The lease is normally the starting point.
Commercial leases commonly contain a detailed service charge schedule identifying the services a landlord can provide and recover from tenants. There may also be exclusions, caps, apportionment provisions and wider clauses dealing with expenditure not specifically listed.
Small differences in drafting can have substantial financial consequences.
If a charge is disputed, relevant documents may include:
the lease and service charge schedule;
current and previous service charge demands;
budgets and year-end accounts;
invoices and supporting expenditure;
details of proposed or completed major works;
correspondence with the landlord, tenant or managing agent; and
documents showing how expenditure has been apportioned between occupiers.
These can help establish whether the charge is permitted by the lease and whether there is a commercially worthwhile basis for challenging or defending it.
Some of the largest disputes arise where a landlord undertakes substantial works and seeks to recover the cost through the service charge.
A key issue can be whether expenditure represents legitimate repair or maintenance of the building or an improvement which the tenant argues falls outside the service charge provisions.
Disputes may also concern whether the works were reasonably required, the amount spent, whether costs relate to the particular building or premises and how expenditure has been divided between occupiers.
Where substantial expenditure is proposed, both landlords and tenants can benefit from considering the service charge provisions before the money is spent rather than waiting for a dispute over the subsequent demand.
Commercial tenants sometimes negotiate a cap on their service charge liability, particularly where they want greater certainty over the overall cost of occupation.
A lease may also exclude particular categories of expenditure or limit liability for structural works, improvements, historic defects or expenditure relating to other parts of a development.
Disputes can arise over how these provisions should be interpreted, whether the cap applies to particular expenditure and whether any exceptions allow the landlord to recover additional amounts.
This makes the precise drafting of the lease particularly important.
Simply withholding a disputed service charge can be risky.
The landlord may pursue the outstanding amount as a debt and may have other remedies under the lease. Interest and legal costs may also become an issue.
However, that does not mean a tenant should automatically accept a substantial or unexpected demand without examining whether it is contractually recoverable.
The appropriate strategy might involve requesting further information, challenging particular elements of the demand, negotiating, making a payment while reserving the tenant's position or defending recovery proceedings.
The amount at stake and the wider relationship between landlord and tenant should form part of that decision.
A service charge dispute rarely needs to be considered in isolation.
For example, is the lease approaching renewal? Is the tenant considering exercising a break clause or assigning the lease? Are there rent arrears or dilapidations issues? Does the landlord have redevelopment plans? Is the tenant looking to remain in the premises and negotiate a new lease?
A service charge dispute may therefore be one element of a wider negotiation.
Understanding those objectives at an early stage can affect how firmly a particular issue should be pursued, when it should be raised and whether there is scope for a broader commercial settlement.
Where expenditure is apportioned between several occupiers, the same issue may affect numerous tenants within a building or development.
It can be useful to establish whether other tenants share the same concerns, particularly with substantial major works or disputes about the allocation of expenditure.
A coordinated approach can strengthen the practical position and may make the cost of obtaining specialist advice more proportionate.
For landlords, a challenge from several tenants can also significantly increase the financial importance of resolving the underlying interpretation of the lease.
We advise commercial landlords, property owners and managing agents as well as tenants.
This includes interpreting service charge provisions, advising whether proposed expenditure can be recovered, dealing with challenges to major works or other expenditure and pursuing unpaid charges.
Advice before substantial expenditure is committed can be particularly valuable. If the recoverability of a proposed cost is uncertain, resolving that issue before the works take place can reduce the risk of a much larger dispute afterwards.
Where the same issue affects several leases within a building or portfolio, we can also advise on the wider implications rather than treating each challenge separately.
Service charge disputes need to make commercial sense.
A disagreement over a relatively modest annual adjustment requires a different approach from a six-figure dispute over major works or a recurring interpretation issue affecting several properties.
We consider the wording of the lease, the amount at stake, the evidence, the wider landlord and tenant relationship and the potential costs of pursuing the dispute before recommending a strategy.
If you are a commercial tenant facing an unexpected or substantial service charge, or a landlord or managing agent dealing with a challenge or unpaid charges, we can review the lease and relevant documents and advise on the options.
Contact our specialist commercial property disputes team to discuss your situation.
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