Commercial Property Service Charges Post Pandemic: Questions you should be asking

There has been a generalist approach to service charges over the last 18 months which much of it being treated in the same way as rent, with temporary cessers, and % payment reductions. This has been fuelled by the moratorium on repossession for non-payment of rent including non-payment of commercial service charges. But in the context of service charge year ends and works which will be required going forward, is that the right approach?

Issues regarding your commercial property service charges which you should be considering:

1. Is it reasonable to treat service charge reductions akin to rent and treat all tenants occupying the estate in same way? The recently reported example of WH Smith agreed a blanket 50% suspension clause in their lease renewal would suggest otherwise. The centre had to stay open even though all other shops were closed because WH Smith were an essential retailer. Admittedly they received reduced services and savings accordingly. Is it reasonable to make sole occupiers pay for all the services provided when they suffered from such a loss of trade? Equally is it reasonable to apportion those more limited services between all the tenants, including the closed ones?
2. Landlords have still been obliged to provide services even though estates may be empty. At the end of the service charge years, landlords would be advised to negotiate with their tenants to waive the obligations in return for reduced payments or credits. This would take account of reductions in utilities, and deferment of major works.
3. Sinking funds or balancing charges at the end of the year? Landlords with sinking funds are likely to have good balances for any planned major works, but where leases provide for balancing charges or credits at the end of the year, tenants are likely to be due substantial credits which could affect cash flow. If there is no provision in the lease for mid-year credits, it could be some months following year end before tenants receive the benefit of these savings
4. Renewal negotiations are likely to see service charge suspension clauses being linked to rent suspension clauses, more targeted negotiations around what benefits a tenant is actually receiving, service charge caps, adjusted payment terms, and provision for mid year credits when it’s clear there will be a surplus.
5. If there are any arrears, landlords should remember to check if there are any former tenants who may be liable;
6. If the landlord has the ability to issue a final certificate which is conclusive, this really will be conclusive – Sara and Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd [2020]. These types of clauses are likely to be challenged on renewals, and tenants taking new premises should make proper enquiries about planned expenditure.

Service charges are likely to become a more contested area as landlords start considering whether to implement works which have been deferred. Parties should check their leases carefully and make sure they are aware of their obligations, and what they are paying for. Consider a consultation process even if one isn’t required, so everyone on the estate is fully aware of future plans.