What are commercial service charges and estimated costs?

Understanding service charges for tenants

Commercial service charges are paid by tenants to landlords for the upkeep of the property they let. While they can sometimes be a controversial subject, they are a necessary part of the landlord/tenant relationship. We take a look at what commercial service charges entail, as well as how their cost can be anticipated by circumspect tenants.

What does a commercial service charge include?

Service charges cover both amenities and services provided by the landlord on behalf of the tenant. These may include:

• Maintenance of the building
• Repairs, from minor to major structural issues
• Cleaning
• Lighting
• Heating and air conditioning
• Refuse collection
• Security
• Staff costs to undertake the necessary work
• Property management fees
• Insurance

What is a sinking fund service charge?

A sinking fund is a type of service charge used to raise funds necessary for replacing facilities or to maintain common areas not covered in rent charges. Tenants of multi-occupancy commercial buildings, such as shopping malls, office developments, industrial estates and purpose-built business parks will often have a service charge clause written into their lease.

Sinking fund charges are used to ensure that on-going maintenance and repairs take place when they are needed and that the money is available to pay for them. It also guarantees that the landlord will not be out of pocket when such eventualities arise.

RICS Advice on Lease Negotiations

A list of precisely which services are chargeable to tenants should be outlined in the lease. The Royal Institution of Chartered Surveyors (RICS) outline best practice for landlords when drawing up a lease to ensure it is compliant with RICS’ 2006 Code of Practice on Service Charges in Commercial Property.

RICS recommends that landlords should provide potential tenants with explicit ‘best estimates’ of costs which may be incurred during the lifetime of the lease, how they arrive at the figures and whether the costs include long-term capital expenditure.

Advice for Tenants

Tenants also need to establish the proportion of service charges which they will face if the property is not fully-occupied. A ‘fair’ proportion should be based on the square footage of their particular unit in comparison to other similar units in the property. They may also consider negotiating a Charge Cap which sets a limit on any payments which they might be required to make.

Estimated costs- what are landlords' responsibilties?

Landlords should provide their established tenants with an annual schedule of estimated costs for the forthcoming year, usually before the new financial year starts. They can then collect payments in quarterly instalments.

The Landlord should have his or her service charge expenditure audited and that information passed onto their tenants. Any shortfall must be made up and any surplus can either be credited towards the coming year’s charge, or refunded.

Disputes over service charges

Disputes between landlords and tenants over service charges are common and notoriously difficult to resolve. It is for this reason that lease negotiations must be fair and reasonable, and that landlords must adhere to the RICS Code of Practice. The advice of a RICS-qualified surveyor should, therefore, be sought by both parties to ensure that both are satisfied with the outcome of the agreement.

If you need professional advice regarding service charges, whether you’re a landlord or a tenant, contact a member of our team. Our RICS-qualified surveyors can offer you guidance on all aspects of lease negotiation, including ensuring that service charges meet everyone’s expectations.