Introduction
Many businesses are looking for ways to reduce costs in order to survive the difficult trading conditions presented by the current economic climate. Where a business is the tenant of the premises which it occupies, it may be possible to reduce costs by challenging service charge demands.
This article is aimed at commercial tenants who have received a service charge demand or who anticipate doing so and aims to provide some practical tips and ways to challenge some or all of the service charges.
Before you receive the demand
It is possible to take some early measures even before you receive the demand. By engaging in open and frequent dialogue with your landlord and by attending regular tenants' meetings, you can discuss the services with your landlord and with the other tenants.
You, as a tenant, may have identified some services that you believe are not necessary. For example, you may feel that the level of security provided by the landlord is excessive, or that cleaning costs are too high. There are other "soft" services which you may look to challenge in the current market conditions. Are the landscaping and gardening costs too high or are they necessary at all?
You can also check other sites which you occupy. If the sites are similar in terms of location and size, you should expect the service charges to be similar. If there are discrepancies, you need to investigate and make enquiries of the landlord.
You should also look at other sites which your landlord owns and which you do not occupy. Is your landlord providing similar services on other sites or do the levels of services provided vary from one site to another?
By attending the tenants' meeting and talking to the other tenants, you may discover that those other tenants share your views. You can then inform your landlord, who may have been entirely unaware that the tenants believed the level of services provided to be excessive. If you have researched other sites, you can use the information you have obtained when you enter into discussions with your landlord.
By taking these steps at an early stage, you may be able to make significant reductions to next year's service charge demand.
After you have received the demand
It is important that you react quickly to the demand, where you disagree with some or all of it. It will also be advantageous if you react collectively with the other tenants on your site. You can use the relationships you have developed with those tenants to ascertain their views as soon as the demands have been served.
If you agree with some of the service charge, it is advisable to pay the part you do agree with. By doing so, you can eliminate any unnecessary dispute and focus on those services and costs you do not agree with.
You will also need to notify the landlord that you do not agree with some of the services and then challenge the part of the service charges you do not agree with.
RICS Code of Practice
The RICS Code of Practice, Service Charges in Commercial Property, came into effect on 1 April 2007. Whilst the Code is guidance and represents best practice rather than the law, it is possible for a tenant to require its lease to be code-compliant by incorporating the Code into the terms of the lease. Even where the lease does not incorporate the Code, the Code still represents best practice, and you may be able to use it to your advantage. Read more about the RICS Code of Practice.
The following paragraphs of the RICS Code of Practice are particularly relevant if you are considering challenging your landlord's service charge demand:
Paragraph 23
The services provided will be beneficial and relevant to the needs of the property, its owner, its occupiers and their customers.
Paragraph 24
The aim is to achieve value for money and effective service rather than lowest price
Paragraph 34
The owner will keep costs under review and, where appropriate (e.g. every three years), require contractors and suppliers to submit competitive tenders or provide competing quotations
Paragraph 35
Owners will require major service providers to continually review methods and processes that produce further value and efficiencies.
Has your landlord complied with the Code of Practice? If not, you may be able to challenge the service charge demand and reduce some of the charges.
Statement of Account
You will also need to look closely at the statement of account which has been provided to you by your landlord. If your lease provides that the statement must be certified, you will need to check that this has been done. You should also look at how the service charge has been apportioned between the other tenants, where applicable.
Under the RICS Code of Practice, the tenant also has the ability to request an independent audit (at the tenant's cost) of the statement.
Your lease
You should become familiar with the terms of your lease. For example, you should be aware if the lease contains a cap on the service charge. If you do not check the terms of your lease carefully, you could be paying too much for your service charge.
In particular, you should look carefully at the "sweeper clause" in the lease. This is the clause which allows the landlord to include less specific or miscellaneous items within the service charge. You should check exactly what has been included in the service charge and then check whether or not the landlord is entitled to include those items by way of the sweeper clause. If not, you are entitled to query those services with your landlord.
The management fee should also be scrutinised closely. Your lease may specify that your landlord is not entitled to charge a management fee, or may prescribe how the management fee should be calculated. Where a management fee has been charged to you by your landlord, you should check this against the RICS Code of Practice, where separate guidance is available on management fees at Paragraph 38. This guidance repeats the requirement for transparency and states that the management fee must be "reasonable for the work properly done in relation to the operation and management of the services".
Conclusion
It is important at all times to remain reasonable and pragmatic in your discussions with your landlord. As outlined above, you should pay those parts of the service charge you do agree with to avoid unnecessary dispute, and be as reasonable as possible when you contact your landlord to challenge some of the charges.
You should be as proactive as possible. Start thinking about next year's charges now, and contact the other tenants where possible. If necessary, seek legal advice at an early stage so that you are aware of your options as soon as possible, and open the lines of correspondence with your landlord at an early stage.
Finally, if you are unable to reach an agreement with your landlord, consider what options are open to you in terms of dispute resolution. Apart from the court process, you may wish to consider arbitration, mediation or the RICS Dispute Resolution Service.
, Associate, Real Estate Litigation (direct dial 0151 907 3515)