What is a service charge in relation to my commercial lease?
Service charges are fees paid by most leaseholders to cover costs of maintaining the building that they lease. They will usually apply to the costs of repairs to communal areas, structural repairs, buildings insurance, freeholders’ administration charges. Service charges can also cover the costs of maintenance of grounds, gardens or cleaning services. It is not unusual for every leaseholder to pay a share of everything, even if one does not use some of the services that the costs cover.
What amount will be payable in a service charge?
The amount that is charges should be stated in the lease. It can vary, but it should include which services are being paid for, when they are being paid, how the freeholder will collect the charges, how the service charges are calculated, how they are divided between the leaseholders and whether there is a reserve fund. The leaseholder does not have to pay for anything that is not specifically stated in the lease.
Payment of service charges
The lease will state when the service charges are to be paid, but they are typically annually, quarterly or half-yearly. They can be variable, which means that the amount paid can change each year. Payment is not liable until the freeholder sends a request for payment. A breakdown of the service charges is usually sent with the bill, as the leaseholder has the right to inspect and retain copies of receipts, the accounts and any other relevant documentation. The freeholder will be committing a criminal offence if they do not allow the leaseholder to inspect and take copies of the accounts. The leaseholder is allowed to charge a fair and reasonable management fee, but they are not allowed to make a profit from this.
Reserve funds
Many leaseholders will have to pay extra towards the costs of things like major repair works and so will hold some funds in reserve. This fund will help to ease the cost of any major repairs that may occur in the future. If a leaseholder vacates the premises before any major repairs have been made, it is unlikely that any contributions to this fund will be repaid. A formal agreement should be made between the leaseholder and freeholder before a reserve fund is set up, and a leaseholder does not have to contribute to this fund if the lease does not specify this.
The freeholder should consult the leaseholders before any major works are undertaken, which usually means any work that will cost over £250.00 for each leaseholder, or any service such as cleaning or garden work that will cost over £100.00 per leaseholder. Before a freeholder arranges these works they should inform the leaseholder what work is being planned, provide copies of two or more estimates for the work and give reasons for their choice of contractor.
The leaseholder will have the right to give their opinion on the work to be undertaken and propose alternatives. However, if the repairs or works are urgent, the freeholder can go ahead with them before the leaseholder has had an opportunity to make their comments. A leaseholder has the right to raise their concerns if they think that their freeholder did not consult them properly or that they have not acted fairly. If this is the case, the leaseholder could be entitled to take legal action through a tribunal, or not have to pay for some of the work.
Issues with service charges
Common issues with service charges include:
- Work not being carried out, or done poorly
- Services not provided that are being paid for, or are not up to standard
- Unfair prices
- Lack of information on what the service charges are paying for
- Charges for services or work that the leaseholder does not agree with
Usually, the best way to deal with these issues is through negotiations between the leaseholder and freeholder. If negotiations fail, the leaseholder can apply to the First-tier Tribunal Property Chamber to make a decision on what services are reasonable.
If a leaseholder does not pay a service charge, the freeholder can apply to the court to remove them from the lease.