Service Charges: Does the Cap Fit?

Landlords of shopping centres and other multi-let commercial properties or estates will almost always retain responsibility for the repair and maintenance of the common parts and the exterior and structure of the building. In return, provisions in the lease allow landlords to pass on their costs for the running and maintenance of the shared parts by way of a service charge.

Service charge

Service charges typically cover the running costs of the building, such as cleaning, lift upkeep, air-conditioning, building security, and general building maintenance. A service charge cap can limit a tenant’s liability and help with cash flow and budgeting.

Tenants can unwittingly find themselves being unpleasantly surprised by sizeable bills that weren’t in the landlord’s budget. This is particularly so at the moment, where costs are increasing across the board.

To mitigate this uncertainty, in recent years, tenants have started to include an annual ceiling or ‘cap’ on their liability for service charges so they always know what the maximum amount would be that they must pay each year.

The landlord’s perspective

The landlord will want to ensure that the service charge clause is wide-ranging and covers all costs that it may incur in relation to the building each year, so it doesn’t have to cover any shortfall itself.

The landlord should therefore require any service charge cap to increase annually to take into account inflationary pressures, which is now more than ever at the forefront of landlords’ minds. This is often dealt with by linking any increase to a widely recognised indicator such as the Retail Prices Index (RPI) or the Consumer Prices Index (CPI).

Seek legal advice to make service charges work for you and protect your interests

Service charge caps have become one of the more contentious parts of a lease in recent years, and so it is vital that both landlords and tenants ensure that they understand how the service charge and any cap provisions work. The competing interests and bargaining power of the parties mean that there is often a balance to be struck, and both parties should satisfy themselves that their interests are protected through carefully drafted service charge provisions. At Myerson, we can guide you through the legal process and provide advice and assistance on all aspects of a lease, including service charges.