Levying commercial service charges can be one of the most complex, and occasionally controversial, aspects of owning a commercial property.
Service charges represent a major source of income for landlords, with the Royal Institution of Chartered Surveyors (RICS) estimating it to be worth around £6 billion a year.
It is also an unregulated industry, which is where some of the potential for tension between landlords and tenants arises, especially in multiple occupancy sites such as office blocks, retail developments and industrial estates.
The complexity arises from the need for landlords to negotiate service charges with each tenant individually as part of their lease agreement. The charges are themselves a perfectly legitimate means of covering maintenance costs consistently across a whole site – leaving repairs and upkeep to individual tenants would inevitably lead to inconsistency and pose a headache for landlords.
In lieu of various shifting and overlapping codes of best practice, the payment of service charges has evolved into a system whereby tenants pay quarterly in advance. Landlords are encouraged to create a budget forecasting service expenses for each tenant. This is then compared to actual expenditure at the end of the year, with refunds or additional top-up charges due.
This is where the friction can arise, with big discrepancies in budget and final costs potentially ensnaring landlords and tenants in costly legal wrangles. Put simply, tenants do not like their money being spent up front, and then being asked for more than they were told it would cost. Tensions can also arise over different charges levied to different tenants, although that is usually caused by variables such as the age and fixtures and fittings in different units.
Read Red Rock Facilities Management company’s 5 tips for managing commercial service charges.