Across our diverse client base, on average, 1 in 6 leases benefit from a service charge cap & some of our clients are now getting caps on more than 50% of their new sites/renewals.   Most of those caps are based on a figure specified at term commencement and increased annually by reference to RPI.  The computation is not always clear and many mistakes are made but that’s a subject for another day!  In this article, we want to explore emerging alternatives to what had become the industry ‘norm’.  This is increasingly relevant with the impending impact of rapidly increasing inflation – talk of 15%+ in some reports! There are many and varied alternatives and here are a few to consider:

‘The lesser of’

The annual increase is the lesser of (i) RPI or CPI or (ii) 3%/5% [or another agreed percentage]

This has the advantage of protecting the occupier from rapidly rising inflation whilst at the same time retaining the benefit of a possible reduction in RPI/CPI in future years.

‘The percentage reduction’

Rather than having a mechanism that increases the figure annually, instead introduce the concept of the service charge payable being reduced by a fixed percentage.  So, the service charge is determined in line with all the other lettable units but the rate paid by the Tenant is limited to say 60% or 70% of that figure.  This is a clear and simple approach.  It also makes documenting the cap very easy for all to understand and agree.

‘The sinking fund option’

One of the greatest problems with agreeing a low level of cap is the risk to the landlord of a major shortfall when exceptional works are required e.g. re-roofing.  We have managed to overcome this hurdle by setting the cap based on a low recurring cost level with some limited additional scope to build a sinking fund over years to fund major works.  This way the Tenant gets certainty and protection and the Landlord retains the ability to recover the some or all of the cost of major works.

‘The fixed amount/fixed increase’

With shorter lease terms, some are managing to agree a fixed annual sum that shall not be exceeded or an all-inclusive rent.  There is also the option of a fixed percentage increase rather than being linked to RPI/CPI.

When it comes to service charges, a cap is the ultimate protection.  If that’s not possible there are other ways of improving your position – check out our ‘pre-contract tips’.

To find out how Assure can help with reducing your occupancy costs, download one of our free eBooks or fill out the contact form below: