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Jan 25
If you rent your business premises, the lease will almost certainly contain a provision setting out an obligation to pay a service charge to your landlord for whatever repair and maintenance works may be necessary to ensure the premises is kept to the required 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 unreasonable or excessive.
The general principle that applies, when considering the reasonableness of the service charge provisions in a lease, is that a tenant’s contractual obligations are usually limited to the relevant provisions of the lease, which ordinarily require the tenant to contribute to the repair and maintenance of the business premises. This does not usually extend to general improvements or a refurbishment of the premises.
Sometimes a landlord will try to widen this remit, and the lines may be 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 a roof, then a genuine repair might only require replacement of those tiles. If the whole roof were to be replaced however, this may well stray into an improvement for the benefit of the landlord, and may go beyond an acceptable repair under the service charge agreement, especially for a shorter lease.
Even when it is clear what is covered in the service charge, a dispute may arise if the costs charged for that work are excessive, or are not explained properly, or seem unfair. This can be a major issue for any tenant. While you can easily budget for rent, it is far harder to budget for unknown service charges and lack of clarity on this can lead to disagreements and disputes.
For example, in premises with several tenants, there may be a dispute on what proportion of the work is charged to each tenant. A recent court case, Criterion Buildings Ltd v McKinsey & Company Inc, found that where a landlord had applied their own discretion on what the proportions should be between tenants, this was acceptable and not for the tenant to change unless the landlord’s discretion was clearly irrational.
In contrast with residential service charges, which are subject to extensive there is very little legislation relating to service charges in a commercial context. However, there is a statutory 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.
Therefore, what you have to pay and whether this can be enforced against you as a tenant will generally depend on the terms of the lease. The lease will set out not only what you 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 claim being brought against you by the landlord to take back the premises as a result of those breaches of the lease.
Indeed, the recent High Court case of Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd concerned this very point, and the court found that tenants should pay now and argue later in order to avoid repercussions.
Therefore, while it may go against the grain, it is often advisable to pay the requested service charge pending resolution of your dispute, subject to the relevant lease provisions. However, you should 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.
Your lease may suggest that an alternative dispute resolution, such as mediation or arbitration, should be used first. These are often a more cost proportionate approach to resolving a dispute. Alternatively, the lease might provide for any points of dispute to be resolved by an independent surveyor.
If these alternative dispute resolution solutions do not resolve the matter, it may be possible for you to take your dispute to court for a judge to resolve.
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 relevant circumstances. This will include circumstances such as the lease terms, 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, where it found that an excessive service charge had been paid, would be to order this to be repaid by the landlord.
If, alternatively, the court finds that the service charge is reasonable, then it may order you to pay the amount owed, as well as the landlord’s legal costs in defending the proceedings.
The court has wide powers more 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.
While there is little legislation that helps, the Royal Institute of Chartered Surveyors (RICS) has produced a professional code in respect of commercial service charges.
Whilst 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 by appointing a mediator to adjudicate on the dispute, or to instruct an independent expert and have the parties agree that they will be bound by that expert’s findings.
Often time is of the essence, so it is important you seek professional advice as soon as you recognise there is a potential dispute in respect of the service charge in order to review your position, assess your option, and take the necessary steps, whether through negotiation or a more formal resolution via court proceedings.
For further information and assistance, please contact Matthew Hill in the Dispute Resolution team at Raworths based in Harrogate, North Yorkshire on 01423 724611 or email matthew.hill@raworths.co.uk
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.
Published on 23 January 2025