10 Pre-Contract Lease Tips For Service Charge

Control of occupancy costs has never been more important.  Here we set out some key considerations when signing up to a lease subject to a service charge:



1.  Get a Service Charge Cap.
  When signing short term leases or short-term extensions/renewals, this is particularly crucial as it can protect against large increases from major works. Try to get the cap to include insurance.

It is equally important to exclude phased recovery of works when cap is in place. Additionally, avoid having the Landlord split out Energy costs from the capped amount.

When agreeing a cap, the Indexation Provisions are becoming ever more important. CPI is better than RPI, but both are increasing rapidly, so think about an upper limit.  Perhaps capping the increase to a maximum of say 3% per annum.



2.  
Reduce Your Proportion.  Ensure apportionment is based on derived benefit and is fair and reasonable even if determined by floor area or weighted floor area. Look to get void or remote storage areas excluded from your floor area calculation.

If allowances for variation is included ensure this does not allow your share/costs to increase e.g., “The Landlord shall be entitled by giving written notice to the Tenant to reasonably vary (but not increase save that where as a result of the Tenant’s use of the Premises or some other act or omission on behalf of the Tenant it is reasonable to increase) the Tenant’s Proportion.”

Avoid rateable value as this benefits large tenants more than smaller ones and can vary widely from year to year.



3.  
Conclusive & time limits to challenge.  Avoid including the word “conclusive” within certification clauses e.g. The Landlord shall on each occasion furnish to the Tenant as soon as practicable after such total cost and the sum payable by the Tenant shall have been ascertained a certificate as to the amount of the total cost and the sum payable by the Tenant and in the absence of manifest or mathematical error or fraud such certificate shall be conclusive

Avoid including time limits to challenge e.g., 3 months from receipt of certificate. Restrict the recovery of omissions to only one previous Accounting Period.



4.  RICS Professional statement.  
The Service Charge is to be operated by the Landlord subject to and in compliance with the RICS Professional statement “Service charges in commercial property 1st edition, September 2018” or subsequent versions.

 

5.  
Exclude marketing (see exclusion list).  Or at least ensure the landlord must contribute 50% towards all marketing costs including any research costs.

 

6.  
Sinking and Reserve Funds.   Make sure these funds are excluded (see exclusion list) especially if there is a cap.

If recoverable then ensure unused funds are to be refunded at lease expiry.



7.  Sweeper Clause.  To include consultation with tenants when introducing new services and must be approved by the large percentage of the tenants; for example 75% of tenants.



8.  
Management fee.  When agreeing caps try to make it clear what is included in the cap, for example managing agent fees, account admin fees, cost of producing certificates, any help desk and centre admin staff.



9.  
Break Clause.  If your lease includes a break clause, make sure full payment of the service charge is not a condition of the break notice. Example of a break clause:

xx.1  If either the Landlord or the Tenant shall desire to determine the Term on or at any time after the Break Date by serving on the other not less than 6 months’ prior written notice of such desire, then immediately on the expiration of such notice the present demise and everything herein shall cease, but without prejudice to all rights and remedies of either party against the other in respect of any antecedent claim or any breach of covenant.

xx.2  In the case of the Tenant exercising the break, this Lease will only end if the Tenant has:

xx.2.1  Paid the Principal Rent due up to the relevant Break Date;



10.  
Exclusions.  As well as the usual exclusions, try to include the following:

a.    All costs relating to refuse disposal other than from the Common Parts (if you have your own refuse service)

b.    All costs incurred in providing any services outside the normal trading hours of the Estate/Centre (if you do not have extended trading)

c.    All costs relating to the initial installation of any machinery or service including security cameras and equipment

d.    Any costs necessitated by the negligence of the Landlord or any of its agents

e.    Any costs incurred by the Landlord in connection with unlet and/or unoccupied Lettable Units

f.    The amount by which the service charge for any other tenant or occupier of the Estate/Centre exceeds any service charge cap for such tenant or occupier

g.    Any costs of amount paid in relation to items or services from which the Tenant and/or the Premises derive no benefit

h.    Any costs incurred by the Landlord in connection with the installation operation maintenance repair and removal of any infrastructure collection points or vending machines in connection with any Deposit Return Scheme operated within the Estate/Centre

i.    Latent or Inherent Defects or Historic Contamination at the Estate/Centre

j.    Replacement or rebuilding where the item in question is not beyond economic repair

k.   Payments or contributions towards any sinking fund, reserve fund, depreciation fund or similar type of fun

l.    All costs in relation to or connected with the promotion or advertising of the Estate/Centre

m.  Notional rent for any management accommodation

n.   Any costs incurred prior to or after the expiry of the Contractual Term

o.   The costs of obtaining an EPC, the costs relating to the improvement of the Building’s EPC rating, and any other costs of dealing with the regulations that derive from the Energy Act 2011 including the Energy Efficiency (Private Rented Property) (Englandand Wales) Regulations 2015 (SI 2015/962).



We hope you found these tips of interest, if you would like to speak to one of our experience Lease Expense Managers, contact us by completing the form below:

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