Your options to address these concerns
If you rent your business premises, part of the rental agreement will almost certainly involve an obligation to pay a service charge to your landlord for whatever works may be necessary to maintain the premises up to a certain standard. However, disputes can arise when the service charge is more than expected, or if you believe you are being asked to pay for works that are not necessary.
When is a service charge item unreasonable?
The general principle which applies when considering the reasonableness of service charge provisions in a lease, is that a tenant’s contractual obligations are usually limited to a requirement to contribute to the repair and maintenance of the business premises. Their obligation does not usually extend to general improvements or a refurbishment.
Sometimes a landlord will try to widen this remit and the lines may become blurred between what can be considered a genuine repair and what is an improvement for the benefit of the landlord. For example, if several tiles have come off the roof of the premises, a genuine repair might only require replacement of those tiles. If the whole roof were to be replaced, this could be considered an improvement for the benefit of the landlord, and may well go beyond an acceptable repair under the service charge agreement.
What if the costs seem excessive?
Even when the service charge provisions are clear as to what is covered, a dispute may arise if the costs charged for specific work are excessive, are not explained properly or seem unfair. This can be a significant issue for a tenant. While rent can easily be budgeted for, it is far harder to budget for unknown service charges so lack of clarity on this point can lead to disagreements and disputes.
An example we see in practice concerns premises with several tenants, as there may be a dispute on what proportion of the work is charged to each tenant. A 2021 court case, Criterion Buildings Ltd v McKinsey & Company Inc, found that it was acceptable for a landlord to apply their own discretion as to what the proportions should be between tenants. The decision made clear that the tenant cannot challenge this decision, unless the landlord’s discretion was clearly irrational.
Resolving a dispute with your landlord over the service charge
There is extensive legislation covering residential service charges. In contrast, there is very little legislation covering commercial tenants, other than a six month time limit on claiming against a former tenant for an unpaid service charge. Most commercial tenancy disputes will rely on case law to persuade a court of their position.
As a result, what a tenant has to pay and whether this can be enforced against them will generally depend on the terms of the lease. The lease will set out not only what a tenant must pay, but often also what to do in the case of a dispute over service charges.
It may be very tempting to refuse to pay while a dispute is unresolved, but often a lease will say that refusal to pay a service charge will be a breach of the lease, which could lead to a forfeiture claim being brought against you by the landlord to take back the premises.
Indeed the High Court case of Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd (which was later appealed and decided by the Supreme Court) decided on this very point, and effectively said that tenants should pay now and argue later to avoid repercussions.
It is therefore advisable to pay the requested service charge pending resolution of your dispute. You should, however, make it clear (preferably by way of an accompanying letter from your solicitor) that any payment is being made ‘without prejudice’ to your right to dispute the service charges, and to have this decided upon independently if necessary.
There may be a clause in the lease stating that an alternative dispute resolution, such as mediation or arbitration, should be used before court proceedings. These can be a less expensive way to resolve a dispute. Alternatively, the lease might provide for any points of dispute to be resolved by an independent specialist.
If these alternative dispute resolution solutions do not resolve the matter, it is possible for you to take your dispute to court.
A court will look at the lease provisions and what is being requested of you, and will determine what is reasonable by taking into account all of the facts. This will include not only the lease terms, but the market conditions and other factors such as whether you have a long lease or if you plan to end your tenancy.
The court’s main remedy would be to award damages if they find in your favour. If you have paid an excessive service charge, the court will order this to be repaid by the landlord.
Alternatively, if the court finds that the service charges are reasonable, they may order you to pay them.
The court has wide powers generally, and might order ‘specific performance’ if that is more appropriate. For example, to make your landlord provide you with a full breakdown of costs.
The RICS Code
While there is little legislation to assist with these claims, the Royal Institute of Chartered Surveyors (RICS) has produced a professional code in respect of commercial service charges.
While landlords do not have to take account of the RICS Code by law, when a dispute about commercial service charges arises, any third party (such as a court, or a mediator) who adjudicates on the dispute will take the terms of the RICS Code into account when considering the reasonableness of the landlord’s claim for the service charge.
The RICS Code encourages parties to resolve disputes through alternative dispute resolution methods, such as appointing a mediator to adjudicate on the dispute, or to agree to be bound by an independent expert’s finding.
How we can help
We can review the position with you, assess your options and take the necessary steps, whether through negotiation or a more formal resolution via court. Often time is of the essence, so it is important you seek professional advice as soon as you recognise that there is a problem with the service charge. Our solicitors have many years of experience in this area.
For further information and assistance, please contact Rebecca Beynon-Phillips in the dispute resolution team on 01733 882 877 or email [email protected].
Rebecca Beynon-Phillips LLB (Hons), Partner
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