What is a service charge?
A service charge is your proportion of the cost of running the shared elements of a building. In buildings that have a number of tenants, the landlord will often retain responsibility for the elements of the buildings that are used by all tenants eg. the building structure, communal areas, and equipment such as lifts. The service charge to the tenants allows the landlord to recoup the costs for operating, maintaining, repairing and renewing these aspects of the building.
The problem with service charges is that they are a variable charge, and therefore difficult to budget for, and could increase substantially in any year if the landlord has to spend large sums on unanticipated repairs, such as lift replacement or roof repairs. Rent is clear, but service charges are often a hidden cost of being a tenant.
What costs can be included in a service charge?
Your liability for service charges depends on your lease, which will state the items on which you will be required to pay service charges. This might include:
- servicing communal areas eg. cleaning, lighting, heating, water supply, furnishing, and providing fire extinguishers
- servicing the building eg. maintenance of lifts, window cleaning and maintenance and repair of the building structure
- a management fee of around 10% - 15% of costs for overseeing this work
- a proportion of the insurance premium for the building
- fees for auditing the service charge accounts
- a sinking fund (also known as a reserve or setting aside fund). Payments into a sinking fund are held by the landlord until he needs to pay for exceptional items such as replacing the roof, lifts or central heating system
The current English code of practice on service charges states that service charges should not include costs that can reasonably be considered to be part of the original development costs of the building, improvement costs above the normal costs of maintenance, repair and replacement, or future development costs. However, landlords can be creative in presenting these costs as part of the service charge!
Your lease will set out how your proportion of the service costs for the building is calculated. The apportionment of costs might be:
- a fixed amount or a capped service charge (where the maximum payable by you will be specified)
- a percentage of the total service costs, based on the rateable value of the premises you occupy or the floor area of the premises you occupy, or
- a fair and reasonable proportion of the service costs
Apportioning service charges on the basis of floor area occupied by each tenant is most common.
You should always scrutinise service charge demands to ensure that you are paying only for items listed in your lease, and the appropriate proportion of the costs. Landlords may, for instance, try to pass on service charge costs associated with unlet offices in the building or try to charge you for items that have not been agreed in the lease.
How are service charges administered?
Rather than billing you each time money is spent on servicing the building, the landlord may, if provided for in the lease, charge you a quarterly service charge fee in advance. At the end of the year, the landlord will debit or credit you for the difference between the amount you’ve paid and the amount that has been spent. At the beginning of the service charge year, you should receive an estimate of the service charge for the year. At the end of the year the landlord should provide a service charge account setting out what has been spent.
Your lease will set out how the service charge is to be administered. Ideally, your lease will require the landlord to provide an estimate of the service charge each year and a service charge account setting out what has been spent at the end of each service charge year. Where the landlord's actual costs are less than the estimated service charge, any overpayments by the tenant are often retained by the landlord and applied towards the next year's service charge.
Unfortunately, in reality, service charge estimates and accounts often arrive late – if at all. In addition, estimates can be unreliable – often significantly over- or under-estimating costs. Check your lease to ensure that the landlord is meeting his obligations regarding the administration of the service charge.
How much should I pay in service charges?
The amount you pay in service charges will depend on the range of services provided by your landlord, as specified in your lease. For instance, you would expect to pay a higher service charge for an office in a building with reception facilities.
What if I disagree with the service charge?
You should carefully review the service charge account to ensure that you are paying only for the items set out in your lease, and that you are being asked to pay the correct proportion of the service costs.
If the service charge appears excessive, you should contact your landlord. The lease might allow the landlord a general right to include items which are not specified in the lease but which he reasonably thinks should be passed on to his tenants. Remember that it is possible to achieve savings on service charges through negotiation. If you cannot resolve the issue with the landlord, you can commission a surveyor with expertise in landlord and tenant issues to give an independent opinion on the reasonableness of the service charge bill. Expert advice is particularly important if your bill includes large one-off costs such as capital purchases or refurbishments.