A service charge is a charge imposed on tenants to provide a fund from which the services relating to the common areas, for example, public liability insurance, heating, cleaning and lighting will be paid. It is important to note that the rent to be paid in respect of a commercial lease is not attributable to the costs of providing such services. A service charge primarily occurs where a group of tenants are situated within one building, for example, an office block or shopping centres.
What are the common areas of dispute regarding service charges?
- Insurance: Insurance in relation to Employer’s Liability, Plant and Machinery and Public Liability for the common parts of the building should form part of the service charge.
- Repairs and Renewals: Any money collected for repairs should be held in trust for the tenant, and cannot be used by the Landlord for any other purpose other than the repairs of the common areas.
- Plant and Machinery: A Landlord is generally obliged to maintain and repair such equipment and plant as lifts, boilers and central heating. It is often the case that such plant and machinery may need to be replaced, therefore the Landlord should be entitled to recover the renewal costs of such equipment as well as repair costs. This should be provided for in the Lease.
How is the amount of the service charge determined?
In the first year of the lease, the payments are generally estimated based on the Landlord’s estimate of the probable outgoings for the year. When the actual costs are known, the Tenant receives a refund of any overpayment of same or alternatively, must reimburse the Landlord for any extra charge. This extra charge may be added on to the following year’s service charge payment. For subsequent years the service charges are normally based on the previous years’ costs.
How are service charges apportioned among tenants?
There are a number of methods for calculating a Tenant’s share of the service costs. They are as follows:
- Fixed percentage
- Rateable value
- Floor areas
It is important to note that whatever method is chosen it must be a defined one so as to ensure certainty when calculating a Tenant’s share of the service charge.