Commercial service charges—a practical lease negotiation guide

The following Property practice note provides comprehensive and up to date legal information covering:

  • Commercial service charges—a practical lease negotiation guide
  • Landlord’s service charge objectives
  • Tenant’s service charge objectives
  • Evaluating the likely service charge costs for the letting
  • Evaluating the likely service charge costs for the letting
  • Service charge heads of expenditure—key principles
  • Are the services correct and appropriate?
  • Managing agents’ fees
  • Varying the list of services
  • Fairness, reasonableness and transparency
  • More...

Commercial service charges—a practical lease negotiation guide

Landlord’s service charge objectives

The landlord’s main concern is to ensure that the costs of maintenance and repair of the building are passed on to the tenants and are not deducted from the landlord’s income/rents. This is sometimes referred to as the ‘clear lease’ principle. If the landlord sells its asset, one of the buyer’s key questions will be whether the service charge is fully recoverable. If it is not, then the market value of the landlord’s investment is likely to be impacted.

Other key aims for the landlord are:

  1. flexibility in deciding when and how the services are provided

  2. limiting its obligations in the lease to providing core services while retaining flexibility to recover other sums

  3. maintaining consistency across leases in a multi-let building, and

  4. ensuring that there are no ‘holes’ for costs to fall through. Inevitably, there may be something which is required which did not occur to either party at the time of the grant of the lease so the landlord will want to include a catch-all ‘sweeper clause’ in the service charge which sweeps up any items of expenditure not covered elsewhere in the list of recoverable costs (although note that the Model Commercial Lease (MCL) does not contain a sweeper clause).

Service charge clauses are likely to be narrowly construed against the landlord and

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