Service Charges

Commercial Leasing is always a hot issue. In particular the recent upsurge in Shopping Centres and Retail Parks has brought ever increasing numbers into the relationship of landlord and tenant - and each with its own particular requirements.

The landlord will generally require the tenant to enter into a full repairing and insuring or FRI lease which has the effect of making the tenant responsible for the maintenance of the property and the repair and renewal of same where necessary. In particular, there is an implied warranty in a lease in Scotland that the premises are wind and watertight and in tenantable repair at the commencement of the lease even where this is not in fact the case. This presumption must be specifically dealt with by the tenants so that the exact condition of the premises is reflected in the lease all whether by way of Schedule of Condition or otherwise. If this is not done a tenant could find himself liable for the cost of making good existing defects.

It is also important to establish exactly what costs the tenant will be required to pay in addition to rent and rates.

Any landlord managing property in multiple occupation will recover the cost of providing and maintaining common facilities. Service charges in a large shopping complex will comprise a considerable percentage of overheads and as a result can lead to disagreement and sometimes litigation between tenant and landlord. It is the duty of a tenant's solicitor to make clear the financial implications of the service charge provisions prior to the signing of the lease.

Naturally, a landlord wishes to achieve a "clear" income and it is also the case that this aim may well run counter to the interests of the tenant. Very often, when disputes arise, it is found that lack of clear communication on a regular basis regarding proposed and anticipated works and their costs, are at the heart of the problem. It is in the interests of both landlord and tenant that long term and costed programmes are prepared where possible. Tenants should be consulted in respect of major costs and variations to previously approved estimates, should be drawn to their attention.

What would be unreasonable costs? The following should not be capable of recovery:

• original development costs;
• work which goes beyond the most cost effective means of repair or replacements and could arguably be regarded as improvements;
• costs in relation to units which are unlet/unoccupied;
• costs arising our of any defect in design or construction of the property which arises in the initial years;

There is a sound principle behind service charge provisions, but it is an area open to abuse and careful attention should be paid to this part of any commercial lease.