Service charge caps A quick guide

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Service charge caps A quick guide

Most occupiers of multi-let commercial premises be they shops in a shopping centre, office suites or units on an industrial estate want to ensure that they can budget as accurately as possible for all potential costs and expenses that might arise in any year.

One area that has historically caused some unpleasant surprises to tenants is in relation to service charge obligations during the lease. Whilst a landlord might have produced a budget for the forthcoming year, that was not usually cast in stone and led to tenants receiving higher service charge bills than anticipated.

In the light of the above, in recent years the practice has developed of tenants seeking to impose an annual ceiling on their liability a 'cap' so that regardless of the amount the landlord might actually spend in a service charge year, the tenant knows it will not have to pay more than a fixed figure. This has become increasingly common in retail lettings and has spread to lettings of other types of premises.

From the perspective of the landlord, the cap will need to be set at a level which the landlord believes gives enough scope to cover anticipated costs for the year. If it doesn't, the landlord will have to cover any shortfall itself. This situation would quite probably have an impact on value if and when the landlord came to sell the property. Also, unless the lease is of a very short duration, the landlord will want the cap to increase annually to reflect changes to the cost of services and materials. Frequently, this is dealt with by linking any increase to some generally recognised indicator such as the Retail Prices Index.

Other elements which might be introduced to service charge cap provisions in a lease are generally down to the bargaining strength of the parties. However, the lease could possibly state that the cap is only for the benefit of the original tenant (and possibly successor group companies), and not subsequent tenants. Or the landlord may only be willing to agree that the cap operates for a limited period of time, not the entire term.

It is recommended that any tenant considers introducing the idea of a service charge cap in lease negotiations. Whilst a cap could potentially adversely affect a landlord, it might be the only way that it can persuade a tenant to sign on the dotted line.

If you would like to discuss this or any related real estate commercial issue with our team please do not hesitate to call us on 0345 872 6666 or complete an enquiry form.

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