Excessive service charges and how to dispute them


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This article is taken from the latest edition of Fladgate’s Fashion Update. Please email the marketing team on marketing@fladgate.com to be added to the mailing list for future updates.

Retail shops obtain a number of benefits from taking premises which are within a shopping centre or on a section of high street where one landlord is the owner of a number of neighbouring premises. In particular it often means that the responsibility for providing services, including the maintenance and repair of the common areas, is retained by the landlord rather than being dealt with by individual tenants attempting to work together. This is a simpler system for tenants, who then only have to deal with paying for a relevant proportion of the cost of those services to the landlord as a service charge, the details of which will be set out in their lease.

While this system has many benefits, the downside for the shop owner is the relinquishing of control as to what services are provided and at what cost.  The shop owner will be at risk of the landlord simply failing to perform its obligations, or alternatively performing services for its own benefit or for the benefit of the other tenants, and recovering the cost from the shop owner regardless.

The classic example of this is promotional activities that take place at shopping centres.  While tenants of shops right next to the activity may be happy to pay a share of the cost of this to reflect the increased profit it can generate, the same tenants are likely to wish to draw the line long before the landlord chooses to spend large sums of money on expensive activities which are disproportionate to the increase in profits as a result. A tenant who is required to pay a sum equivalent to its weekend takings for the cost of promotional activities is likely to feel understandably aggrieved.

In such circumstances we are often asked, as lawyers, what can be done.

The starting point must be to check what is said about the service charge in the lease itself. The lease will invariably contain an obligation on the retail tenant to pay a service charge and an obligation on the landlord to provide the services.  If the lease simply states that the tenant will pay a proportion of the cost of the services provided by the landlord, then it may be difficult for the tenant to argue that any service provided should not be paid for.

Luckily, however, most leases contain more detail, and it is particularly helpful where a lease contains a list of services that the landlord is required to provide and a list of those services the landlord is prevented from providing.  When an item is expressly excluded it is fairly easy for a retail tenant to point to this and say that it will not pay for that item.

In the absence of an express exclusion, another helpful tool will be the existence of the word “reasonable” within the context of the services provided by the landlord.   This gives a foothold for the tenant to start its negotiations about the service charge item incurred. However, as you will expect, the landlord and the tenant will often have very different interpretations of what is “reasonable” in any given context. In trying to persuade the landlord to see the tenant’s point of view it can be helpful to consider what services have been provided in the past, the level of previous years’ service charge and the views of other tenants affected by the charges. Ultimately if matters cannot be agreed it will be a matter for the court to determine.

If possible, it is best to seek to address potential service charge issues within the lease at the point it is being negotiated. The retail tenant should think carefully about the kind of services that it expects and does not expect the landlord to provide and attempt to include these in the lease.

Another useful tool, is for the lease to provide that any dispute arising in respect of service charge will be determined by a jointly appointed expert or arbitrator rather than the court. While this will not prevent disputes, it will hopefully mean a speedy and cheap resolution if they do arise.

Where a tenant is looking to dispute service charge during the term but is not being successful, a surveyor who specialises in service charges and a solicitor is likely to be able to help.

 

If you have any questions about this article, please do not hesitate to contact the property litigation or property team.

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