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. Last Updated: 07/27/2016

Service Charges With a Smile

One of the big costs that a company taking a lease of office premises must bear is operating expenses, alternatively known as service charges.

Sometimes rent is inclusive of operating expenses, which is good news for a tenant because he or she will then know exactly how much money will have to be paid to a landlord each year.

However, a landlord will generally not want to have an all-inclusive rent, because if work needs to be done, or operating expenses are higher than expected, the landlord will want to be able to cover those costs without reducing his rental income.

The following is a checklist apropos service charges for tenants taking a lease of office premises:

1. What services are covered? This will obviously vary from building to building. However, these will generally be needed: heating and lighting, cleaning of common parts, repair/redecoration, provision for security, maintenance of plant and machinery, management fees and possibly parking.

The lease should stipulate that the landlord will provide these services to a reasonable standard. The tenant's obligation to pay for these services (if provided) does not automatically carry with it an obligation on the landlord actually to provide them.

The landlord will seek, sometimes quite reasonably, to qualify the obligation to provide services by withdrawing or varying them. The tenant should make sure that key services cannot be withdrawn, and that variations can only be made on good estate management grounds.

2. Mechanisms for payment. The usual procedure is for the landlord, shortly before the start of each financial year, to provide an estimate of the forthcoming year's expenses. The tenant will be required to make interim payments, usually quarterly in advance. At the end of the accounting year, when costs are known, the landlord will provide the tenant with a statement of the full costs, and of any credits or additional payments to be made.

An issue that needs consideration is how the tenant's proportion will be calculated. The landlord may try to give himself discretion in this calculation by requiring the tenant to pay a "fair and reasonable" proportion of the operating expenses. This should be resisted, and the tenant should ensure the basis for making the calculation is in the lease.

The most sensible method is to use floor area. The tenant's share should be a proportion of the letable area of the building, not the let area of the building. The difference is that if it is the latter, the overall charge will be higher if there are unlet units.

3. Reserve funds. The purpose of a reserve fund is to pay for occasional items of major works or renovation, rather than having these costs borne by the tenants who happen to be leasing the premises.

If the lease makes no provision for a reserve fund, the tenant should find out what work the landlord proposes to carry out in the forthcoming years.

4. Challenging the charge. Landlords will usually want to restrict a tenant's ability to challenge the charge. There is scope for compromise, such as requiring the landlord to obtain tenders for works above a certain amount or permitting a challenge only from a specified number of tenants.

A landlord will generally not be amenable to major changes in the service provisions, because he will want all the leases of a building to be consistent. However, the tenant should ensure the landlord gives full information about services provided and costs incurred, that services are provided to a reasonable standard, and that charges can be justified.

Neil Budd is an attorney specializing in real estate at the firm Watson, Farley & Williams in Moscow.