Service Charge tips for the unwary tech tenant

In our 2018 technology report we looked at building agile businesses in a changing world and explored the need for tech companies to retain flexibility if entering into traditional leasing arrangements as well as the merits of traditional leases against serviced office accommodation.

Whilst serviced office accommodation ticks many boxes for start-up as well as established tech tenants, a natural progression for tech companies is to move towards a more traditional leasing arrangement.

Whilst a number of terms are rightly paramount for tenants, such as the level of rent, repairing obligation and flexibility (both via the ability to assign/sublet and the ability to break), service charge can sometimes be overlooked, especially where tenants are unrepresented or relatively new to the world of commercial property. 

As service charge can be costly, especially within large buildings containing lots of let units, it is important to understand it and get it right. 

At the outset, professional advice from surveyors and lawyers both agreeing Heads of Terms and negotiating leases is always advisable, however here are some points to bear in mind when considering service charge prior to agreeing terms and entering into new leases. 

Agree an annual rent inclusive of service charge

Whilst uncommon, a landlord may agree to include service charge payments within the annual rent if the nature and extent of the property is appropriate and the services provided and annual service costs are fairly predictable. An annual rent inclusive of service charge will provide you with certainty for budgeting purposes. 

Agree a service charge cap 

Service charge caps are more commonly agreed. Caps are beneficial to tenants as the maximum amount of service charge is known at the outset. Again, this will help you for budgeting purposes as annual service charge payments cannot exceed the set cap. 

Ensure the method of calculation and apportionment is appropriate

Generally, the apportionment of service charge to each let unit within a building is calculated by reference to a set percentage, floor area or simply “a fair and reasonable proportion”. Established buildings with existing tenants will generally have a set service charge regime so the scope of negotiation here is fairly slim however, it is important to consider the method of calculation and its appropriateness to the building to ensure you aren’t hit with hidden surprises. 

The lease will list the services the Landlord will provide in exchange for your payment of the service charge. Consider whether these are appropriate for your use and occupation of the building. If there are areas of the building that are in a poor state of repair or that you simply will not use, consider an exclusion ensuring you do not have to contribute towards maintenance and upkeep costs in respect of these.  

Ensure there is an ability to challenge and understand the provisions

Some service charge provisions will contain an ability for tenants to object where they deem the service charge to be inappropriate or excessive, as a minimum in the event of manifest error, and it is prudent to ensure an ability to challenge is present in any service charge provisions you agree. Unlike residential property, there is very little statutory provision relating to commercial service charge so it is important to negotiate and understand the service charge provisions.