Commercial Property Solicitor Mark Rowlands discusses some of the potential traps of service charges for business tenants, and how to avoid them.

Businesses renting part of a building or a unit on an industrial estate often find there is a requirement to pay a “service charge” in addition to the basic rent. This will be an amount payable to the Landlord towards the costs of repairing and maintaining common areas, the structure of the building and perhaps also for providing services such as lifts, cleaning and lighting common areas etc.

Tenants of residential property benefit from significant legal protection in relation to the amount a Landlord can demand for service charges and how the money is spent. These protections apply regardless of what the Lease says. Those renting business premises do not benefit from this protection. If safeguards are not built into the Lease then the commercial tenant has little (if any) control over the service charge.

It is easy to focus on the level of the rent when searching for business premises, and give little thought to the extra cost of a service charge. This can turn out to be an expensive oversight. By the time a large demand comes in, it can be a severe financial jolt – particularly for small businesses. So what steps should you take?

1.		Check the site and the building before you enter into the Lease to see if there are any communal or exterior items which may well require significant repairs during your lease period. Ideally have a professional survey carried out. If this discloses problems, seek a commitment that the Landlord will cover them without requiring a contribution towards the expense.
2.		Try to negotiate an annual cap on the service charge, so that you can budget effectively. This ensures that whatever happens, your yearly service charge will not exceed a certain figure.
3.		Make sure that you find out practical information about the service charge and the history of any communal expenses for the site. Does the Landlord expect any major items to come up over the next few years? Is there a reserve fund for the expenses?
4.		Ensure that the Lease is specific about the types of expenses the Landlord can claim for, and that you have rights to inspect invoices and other receipts supporting the service charge demand.
5.		Make sure that the Landlord is under an obligation to refund any balance of unused contributions at the end of the Lease. In some cases those monies can otherwise be kept by the Landlord.