Challenging Service Charges


This article was published in / Feb-Mar 2016 / screentrade

Cinemas often comprise part of a larger development for which the upkeep of communal areas will be centrally-managed. However, what if cinema operators disagree with the type of services provided, or even feel the services not to be relevant? We offer some practical tips on how to avoid paying for someone else’s party.

Many cinemas today will form part of the wider high street or retail park where the development is owned by the same landlord, and where it is usual, and cost-effective, for the responsibility of providing services to communal areas to remain with the landlord and be handled day-to-day by a management company. Each tenant pays a proportion of the cost of the services through a ‘service charge’ payment as set out in its lease.

When the system works well, it allows the cinema to take advantage of well-managed and welcoming communal areas while benefiting from cost-savings via economies-of-scale. The trade-off, however, can be it relinquishing control over what services are provided, and at what cost, and can mean the cinema putting itself at the mercy of the landlord either failing to perform his obligations, or over-performing and creating an astronomical bill for the cinema to pay.

A classic example of this might be the shopping centre’s annual Santa’s grotto — typically in residence between 9am and 2pm in the run-up to Christmas. A tenant with a shop next to the grotto may be more than happy to pay a share of the costs, since it could benefit from increased footfall. However, a self-contained cinema unit, being busiest in the evenings, is likely to feel aggrieved at being asked to pay towards this cost within its service charge.

Strength in numbers

Where a service charge is being demanded, the lease will contain obligations for the cinema to pay it and for the landlord to provide the services.

However, if the lease simply states that the tenant will pay ‘a proportion’ of the costs of the services provided by the landlord, it is difficult to argue, legally, that the costs incurred should not be paid. This can be frustrating for a tenant who will be stuck paying the service charge for the duration of its lease. Commercially, one option is for the cinema to club-together with other tenants with the same grievances and approach the landlord, as the latter may then be made to take action in the face of a collective show of strength.

Happily, most leases are more specific than the example above and, at bare minimum, should limit tenants to only having to pay for those reasonable and proper costs which are, in turn, both reasonably and properly incurred by the landlord. Reasonableness provides a legal hook upon which the tenant may hang its claim that the service charge incurred is unfair. However, as expected, often the parties may have different interpretations of what is reasonable which can make resolution difficult.

A well-drafted lease can assist here. Firstly, if a cinema can consider in advance of signing its lease the kind of items for which it does not wish to pay, then such items (if agreed by the landlord) can be specifically excluded from the lease, thus avoiding arguments concerning ‘reasonableness’ while also giving the cinema operator a clear clause to which to point, to state that it isn’t responsible for certain costs.

Secondly, for those circumstances where issues arise that couldn’t easily have been foreseen, a lease stating that any dispute will be ‘determined by a jointly-appointed expert or arbitrator’ may mean that resolution without lawyers is possible, and will likely be cheaper and quicker than issuing court proceedings.

In general, the advice must be for both cinema and landlord to agree — at the commencement of the relationship — the types of services that are expected along with those for which the cinema is not prepared to pay. If found in a situation where cinema operators are unhappy with the services provided, or the charges demanded, specialist advice should be sought.

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

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