Cap your service charge

Many tenants sign up to leases which include a service charge but most don't appreciate the extent to which they are effectively signing a blank cheque.

A typical service charge provision will entitle the landlord or a separate management company to provide a range of services to tenants in a building. The landlord then recharges the cost of providing those services to the tenants. Individual tenants will be obliged to either contribute a fixed percentage of those costs or a 'fair' proportion (often the landlord or managing agent is allowed to decide what is fair).

The problem with these provisions from the tenant's point of view is that it has no control over how much money is spent. The service charge provisions are often drafted so widely as to allow the landlord to recover all manner of expenditure (sometimes including an 'administration fee' equal to 10% or more of the total expenditure).

If the landlord or management company decides to go on a spending spree, the tenant could find itself with a huge bill which frequently is payable on demand. Failure to pay can result in punitive interest on the debt and the lease being forfeited. In the current climate such a shock to a tenant's cashflow could be the difference between trading through the downturn and insolvency.

The solution is to negotiate a capped service charge at the outset. This ensures the tenant knows its maximum potential liability and can budget accordingly.

If you are concerned about the service charge provisions in your lease and would like a free lease review then please contact commercial property lawyer Steve Petty 01926 629005.

Steve Petty, Commercial Property Lawyer