Commercial Service Charges Best Practise

Today's blog will provide more detail about the best practise for commercial service charges.  Please note that residential service charges are different so please do not use this blog when considering residential premises. This Blog is also directed to premises in England & Wales – as the law in Scotland will also differ.)

Indeed, due to the amount of conflict in Landlord and Tenant relationships over the years, legislation has been introduced in the residential sector to control service charges but in the commercial property sector things are still catching up.

 

Due to this situation, the RICS launched a Code of Practise in 2007 to set out the standards for best practise in the commercial sector. Whilst this code is not law, Courts do take account of the contents and resultantly, any self-respecting Chartered Surveyor or commercial property company follows this code as closely as possible.

In a nutshell, the Code’s objective is to ensure transparency in service charge budgets so that Landlords don’t make a secret profit or alternatively, make a loss. It’s about finding the middle way and being fair in all circumstances.

 

The Code can be Downloaded from the RICS Books Website http://www.rics.org/uk/shop/standards/

 

Always look at the lease

The first rule in service charge management is to always look at the provisions for a service charge in the lease.  If you do not have a lease but are still paying a Landlord for a ‘service charge’, the matter is rather more obscure but nevertheless as an occupier under Common Law, (I.e. someone who is paying rent/insurance / service charges to a Landlord but does not have a formal written and signed lease), you will still have a right to know exactly what you are being asked to pay for.

The services that a Landlord provides under the lease will be listed in the Landlord’s Covenants and most leases provide the Landlord with an option to add / vary / change the provision of the services in accordance with ‘good estate management’.  The wording of the lease here is important as it sets the context for any changes the Landlord may choose to make to the services at a later date.

What is clear is that the tenant is only liable to reimburse the Landlord so far as the lease allows. If the Landlord’s expenditure falls outside the lease clause, then this cost can’t be recovered from the Tenant.

 

There is no legal presumption that the Landlord can cover all of his costs in running the building and this is where some of the Landlords of multi occupied healthcare buildings need to be careful.

There is also general presumption in law that the Landlord should not profit via the service charge – albeit this can differ depending on the construction of the lease – hence this is why when you agree a lease it is so important to get decent advice before you sign up.

 

Implied Term as to Reasonableness

In the service charge covenants, many leases will say expressly that the Landlord’s expenditure must be reasonable. Even if the lease is silent, there is an implied legal term that when spending on behalf of the Tenants, the Landlord must not to be unreasonable. This was seen in Finchbourne Ltd V Rodrigues [1976] which was a court case which led to the tendency towards an automatic implication of reasonableness with regard to the circumstances of the Landlords service charge expenditure.

This doesn’t mean that the Landlord has to find the cheapest service provider, but it does means that they can’t go overboard when they procure service charge services on behalf of the Tenants when they are expecting to recharge under the service charge clause.  The key phrase is that the Landlord must ‘maintain to standards contemplated by the covenant’.

So if you are a Tenant in a multi occupied health centre and the standards of e.g. plumbing maintenance are set out as a Department of Health Policy, and other health buildings in the area maintain to this policy level, then it will be reasonable for the Landlord to competitively procure the plumbing service to that standard.  This process may not end up with the Landlord instructing the cheapest provider in the market, but the plumbing service will be in tune with the general cost and quality of plumbing in the local health sector for that particular maintenance activity.

What this means is that the factual background of the lease and all circumstances will influence the outcome of what is deemed reasonable or not.

So to add to this ‘plumbing’ example, it would be unreasonable to the Landlord here, to replace the taps in the building with expensive Gold designer ones– as this would be somewhat out of tune from that both landlord and tenant had in mind when they signed the lease agreement.

 

What about building works incorporated in the Service charge?

When something goes wrong in a multi occupied building, eg a roof leak, the Landlord’s decision with regard to that works are necessary or methods to be adopted must always be reasonable in all the circumstances as court cases have shown a willingness to imply a ‘reasonableness’ requirement.

Again, here the factual background to the lease will influence what is deemed as ‘reasonable.’

However, it is all about the Landlord being reasonable in his actions in ‘incurring’ the costs and not whether the actual costs billed to the Tenants are reasonable. This means that it would be reasonable to expect the Landlord to get ‘arms length quotes’ for appropriate works considering all the circumstances.

 

What if the Landlord wants to vary the services provided?

Again this is quite often provided for through the terms of the service charge covenant in the lease. The Landlord has to exercise careful discretion to only vary the service charge services in the very best interests of estate management and definitely not for any personal gain. The decision must be something that would be reasonable for any reasonable Landlord to make in that position.

When making changes the Landlord must ensure that the decision making process is open and fair and that the Tenants are kept informed, even if this is not explicitly required through the lease terms, so that the scope for later challenge by the Tenants is minimised. 

Where there is an existing system of service charging in place, then the Landlord must approach all the Tenants in the building and engage them to obtain an agreement for the proposed variation in the services. This is where the Landlords liaison and relationship with his tenants is very important.

 

 

Next Time:

We delve into Landlord’s Management Charges.