The lease terms

Service charge

Service charge

Where a tenant takes a lease of part it is common for the landlord to be responsible under the lease for carrying out works to structural and exterior parts of the property, which are usually retained by the landlord.

  • A service charge is also sometimes levied with respect to leases of whole property, where the landlord may undertake to carry out works (sometimes limited to keeping the building wind and watertight) with a service charge arrangement.
  • If a tenant is taking a very short lease, it is unfair to expect the tenant to pay a fully proportionate contribution towards the substantial repair or replacement of items such as roof and foundations.  This will disproportionately benefit the landlord. Under the terms of a much longer lease, it may be fair to impose such a liability but the tenant will wish to investigate the position by undertaking detailed enquiries (usually through their solicitor) and may wish to commission a survey of the building.
  • If there is a full repairing lease the tenant may wish to commission a survey to assess the condition of the property in case there are problems with the condition of the property that might lead to very large service charge items such as roof replacement.
  • The easiest, and probably standard, way of dealing with the matter is to include an upper limit or “cap” on the amount of service charge that the landlord can recover with respect to works in any particular year of the term.  The level of this cap is usually increased in line with the index of retail prices.  This is not particularly relevant to property costs, but is easily accessible and readily updated, and is still commonly used despite the fact that various inflation indices can vary significantly during times of economic turmoil.
  • Alternatively, it is possible to agree to exclude liability for certain items from the service charge.  There is always a risk of ambiguity in this kind of clause.
  • Where the tenant is taking on a very short lease (for example three years or less) the best option is often simply to have a flat rate charge for service costs.  The charge in this case will be regarded as rent for the purposes of Stamp Duty Land Tax (SDLT), and if it brings the tenant above the threshold for making a return, a return must legally be made to the HM Revenue & Customs agent.  This is a nuisance, but for registered and unregistered charities no SDLT will ultimately be payable.  [Stamp Duty Land Tax]
  • In the case of new buildings or buildings that have recently been substantially refurbished, the service charge should exclude any items relating to faulty construction of the premises, or non-compliance with statutory obligations, even if there is a service charge cap, as service charges for repairs should be very low in the early years of a new building.  Where there are failures with respect to the fabric of the building or statutory compliance, this will often be  due to failure by contractors or professional advisers, and the landlord will be able to pursue them for a remedy.
  • The tenant should try to ensure, if the lease permits, that any service charge that has not been spent on the building is returned at the end of the lease term.