Commercial Service Charge Disputes

Service charges are a common point of dispute between landlords and tenants.

On the one hand, landlords are responsible for maintaining their buildings and providing specified services to tenants. Failure to fully recover the cost of those services is going to hit them in the pocket, and may impact the building’s value.

On the other hand, tenants need to budget for their lease commitments. Unexpected hikes in service charges or large end-of-year balancing payments can create serious financial headaches. Many disputes arise because tenants cannot see how charges are justified.

The commercial property disputes team at Osbornes works with both landlords and tenants on a wide range of service charge issues. Drawing on our comprehensive experience, we can help you understand your rights and obligations, identify potential disputes early on, and find practical solutions that protect your commercial interests.

What are commercial service charges?

Commercial property service charges are payments made by tenants to landlords, in addition to their normal rent. They are intended to cover the costs of any service the landlord is obliged to provide under the terms of the lease. Typically, they include maintenance and repairs of the building, cleaning shared areas, security, buildings insurance, lift maintenance, and other services that contribute to the upkeep and operation of the building.

Service charges are a common feature of buildings with multiple tenants, such as office blocks. Where the building is shared, the annual cost of providing the services should be divided proportionately between the tenants.

Service charges are meant to be fair and reasonable. Landlords cannot profit from them, which means they should only cover the actual costs incurred by the managing agent in providing the services set out in the lease.

What is a commercial service charge dispute?

Unlike with residential properties, there are no laws controlling what services a landlord must provide to a commercial tenant or what it can charge for those services. Instead, the terms of the lease will dictate what is covered by the service charge, and how it is calculated and paid.

In a typical arrangement, the landlord will provide the tenant with an estimate of the annual service charge at the start of the year. The tenant will pay that amount in monthly or quarterly instalments, and a reconciliation will take place at the end of the year. Any shortfall will be made up by the tenant, and any overpayment will be refunded or, more usually, credited towards the next year’s service charge.

Service charge disputes can arise at any stage of this process. Issues on which our team regularly advises include:

• Whether a particular service was within the scope of the service charge.
• How items were costed and apportioned between tenants.
• Whether the service charge costs are excessive compared to market rates.
• Disputes over sinking funds or reserve funds.
• Whether managing agents’ fees are reasonable.
• Disputes over work not being carried out, or not being carried out to a reasonable standard.
• Whether tenants should be charged for major upgrades they will not benefit from.
• Service charge arrears recovery, including forfeiture proceedings.

What are the landlord’s service charge obligations?

The Royal Institution of Chartered Surveyors (RICS) has a set of best practices for commercial lease service charges. The key points are:

• The landlord can only recover expenditures set out in the lease, and must not exceed 100% of the actual cost of the services.
• The tenant should receive a budget each year and a copy of the service charge accounts highlighting what was spent (i.e. the landlord must keep good records).
• Landlords must apportion the service charge fairly between tenants and explain how the tenant’s proportion is calculated. If a tenant benefits more from a specific service, this should be reflected in their apportionment.
• Landlords should ensure service charges are reasonable and works are carried out to a reasonable standard. As part of this obligation, they have a duty to compare different quotes for services and seek competitive prices.

While not legally binding, landlords and their managing agents are expected to follow RICS guidelines unless they have justifiable reasons not to. Failing to follow best practice may be taken into account by the Court, if a dispute goes that far.

What are sinking funds and reserve funds?

Many commercial leases provide for a reserve fund, a pot of money held to one side to deal with an unexpected, unbudgeted repair. Reserve funds can benefit tenants, as they can stop unexpected large spikes in their service charge.

Sinking funds are less common but not unheard of. A sinking fund is money set aside to replace a wasting asset in the future, such as the lifts or the heating system. Tenants do not like sinking funds as they may not see the benefit of the works, for example, when the work takes place long after the lease term ends.

Reserve funds and sinking funds are often a source of disputes between landlords and tenants. Tenants may feel that they are paying to improve the value of the landlord’s investment, while landlords argue that such funds are necessary for the proper management of the building. We can help you navigate the finer details and assist in resolving any disputes that may arise.

What are the options for service charge arrears recovery?

Unpaid service charges are a debt due to the landlord. If the tenant does not pay the arrears after negotiation or mediation, the landlord can issue court proceedings and obtain a court order in respect of the unpaid service charges.

Once a judgment has been obtained, it can be enforced in a variety of ways. Our commercial service charge dispute solicitors provide personalised advice to help commercial landlords and their managing agents recover service charges in the most effective way.

Often, service charges are specified as being “payable by way of rent.” In this instance, it may be possible to forfeit the lease via a bailiff, without having to issue court proceedings. Forfeiture by way of peaceable re-entry is a fast but procedurally tricky method of removing tenants from business premises – getting expert legal advice is a must.

How do you dispute a service charge?

Tenants often question their service charge demands. If you think you are being charged too much, speak to us. We can review your documents and advise on whether you have grounds to raise a challenge. The lease may have a timetable for lodging a challenge and inspecting records, so it is important to act quickly.

However, it is important to understand that tenants cannot simply refuse to pay service charges, even if they feel they are unfair. This could constitute a breach of the lease and could mean the landlord has the right to forfeit the lease.

If the dispute cannot be resolved straight away, one option for the tenant is to pay their service charge “under protest”. This keeps the door open for the tenant to pursue the dispute while avoiding the inference that, by paying the charge, they accept it as reasonable. If you are considering this option, it is important to seek legal advice first.

Why choose Osbornes for help with commercial service charge disputes?

Our specialist commercial service charge dispute solicitors can offer you:

• Extensive expertise on all types of service charge disputes, including representation in alternative dispute resolution and litigation.
• Independently accredited expertise, being ranked by leading client guide Chambers & Partners, and the Legal 500
• A tailored service, working closely with our clients to understand their priorities and deliver the best possible outcome.
• Practical advice on how to mitigate risk in respect of commercial lease service charges.

To speak with one of our property litigation solicitors, contact us by:

• Filling in our online enquiry form; or
• Calling us on 020 7485 8811