By Anna Main, Director of Commercial Asset Management at Landwood Group
Much has been discussed about the multitude of economic factors that are causing the biggest real-terms crunch in the standard of living across the nation since the 1950s. Global factors such as the ongoing war in Ukraine, as well as more localised issues like the spiralling costs of energy, are creating an almost untenable situation for individuals, businesses and commercial property tenants across the country.
These problems are forecast to get worse before they get better. Only last week, the independent energy consultancy Auxilione delivered the most dire outlook on the price cap yet, revealing that the UK’s energy regulator Ofgem could be forced to set the annual price cap as high as £5,000 – a real-terms rise of nearly 400% in less than 12 months.
With the pressure piling on to bills from all angles, it’s critical for businesses to save every penny. Unfortunately, a number of commercial landlords are compounding these devastating price rises with unscrupulous practices and illegitimate service charges that threaten to irreparably damage smaller businesses across the nation.
As part of their commercial agreements, many landlords are of course obliged to offer, and charge for, certain services they provide. Often these services are necessary and useful toward tenants, such as site maintenance and security coverage, buildings and structural insurance, certain utilities or waste management costs and general elements such as cleaning fees for shared areas. However, while the majority of landlords are playing within the rules, it’s not always the case.
There have been rising reports of commercial property owners that are stretching beyond their purview, and potentially even breaking the terms of their leasing agreements, in order to squeeze some extra cash out of their tenants. But, with a huge amount of detail and complexity inside a commercial leasing agreement, how do businesses determine whether their charges are above board or totally illegitimate?
The first thing to do is to collate all of your data. Commercial leasing agreements are often complex and detailed, with some offering a clear establishment of what responsibilities are placed upon the tenants and what sits with the landlord, and others simply stating a general terms agreement for maintenance fees or the like. Detail out every point in the lease agreement that references any charges, and then pull together recent invoices from your landlord that shows how much you’re spending on service charge fees.
These fees should be based on actual figures from the previous year, or as will be the case now thanks to the large amount of fiscal inflation, estimates for the year ahead. While a landlord isn’t obligated to ensure the lowest cost for any service charge unless specifically mentioned in the contract, they are required by law to be ‘reasonable’ – meaning that you shouldn’t be charged thousands for a job that cost less than one hundred pounds.
As a business, you should also only ever be charged for services that your business directly benefits from, such as building maintenance or repairs on internal facilities like elevators. If you’re not seeing any benefits from a service, you shouldn’t be charged for it. Ensuring that you have a full breakdown of your charges will support any claim you make should you find out that your landlord is charging you illegitimate fees, and will be required for your case if your claim goes to tribunal.
Ask your landlord for the real or estimated charge figure breakdown, and a full itinerary of the charges to determine whether you’re being fairly charged for services you require. These charges can stretch into the level of ridicule for businesses, including receptionists they don’t use, plant maintenance on equipment they don’t own and even teas and coffees.
In one specific case that was dealt with by Landwood, a commercial tenant found that it had overpaid its landlord around £40,000 on its service charges for electricity and air conditioning – both of which weren’t even present in the unit they were operating out of.
There are certain circumstances where service charges can fall into slightly grey areas, making reconciliation and assignment trickier. These can include:
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Building upgrade works: These are often excluded from a commercial lease agreement in the private sector but included on contracts from local authorities or housing associations.
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Legal and Management fees: Despite being a fact of property management, a landlord can only recover these fees if it’s included in a commercial lease, making it important to check for in your lease review.
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Caretaking/Portering: If included in a lease, this should clearly spell out how, and what, you’re paying for. The service level, areas managed and even whether there is on-site accommodation can all affect the charges, so make sure you review carefully to understand your obligations.
While smaller businesses may be able to easily discern if, and where, they’re overpaying on service charges, it can become extremely tricky for larger businesses that often operate across multiple sites to distinguish between fair and illegitimate charges. In these cases, you’re best investing in some expert support from a consultancy or property management expert that can audit your entire service charge outlay and reconcile against your actual business usage.
For many commercial tenants, service charges are an oft-overlooked part of their leasing agreements. These charges are formed of many moving parts and are subject to a number of contributing factors that can alter their costs, making it difficult to accurately track whether you’re being overcharged. However, with the cost-of-living crisis continuing to spiral out of control, every penny that can be saved is vital – and ensuring you’re not being overcharged for your services is now a crucial step for businesses of any size.
