‘You may feel that you have no option but to pay what you consider is an excessive or unnecessary service charge following demands by your landlord, for fear of being removed from your business premises,’ says Mark Blake, Partner and dispute resolution solicitor with QualitySolicitors Parkinson Wright. ‘But there are options available to you, and the first step will be to look at the lease.’
Mark looks at the common reasons for disputes, and the steps you should take to protect your interests under the lease while not paying over the odds for unnecessary work.
When is a service charge item unreasonable?
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 a requirement to contribute to the repair and maintenance of the business premises. This does not usually extend to general improvements or a refurbishment.
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.
What if the costs seem excessive?
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.
Resolving a dispute with your landlord over the service charge
There is extensive legislation covering residential service charges. In contrast, there is very little legislation covering commercial tenants except that there is a 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.
Indeed the recent High Court case of Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd, decided on this very point, and said tenants should pay now and argue later to avoid repercussions.
Therefore, while it may go against the grain, it is advisable to pay the requested service charge pending resolution of your dispute. 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.
Hopefully your lease may suggest that an alternative dispute resolution, such as mediation or arbitration, should be used first. These are often a less expensive way to resolve a dispute. Alternatively the lease might provide for any points of dispute to be resolved by an independent specialist.
If these alternative dispute resolution solutions do not resolve the matter, it is 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 facts. This will include not only the lease terms, but 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 would be to award damages if they find in your favour. If you have paid an excessive service charge, the court will order this to be repaid by the landlord.
If, alternatively, the court finds that the landlord’s costs are reasonable, then they may order you to pay these.
The court has wide powers 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.
The RICS Code
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.
While 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 agree to be bound by an independent expert’s finding.
How we can help
We can review your position with you, assess your options, and take the necessary steps for you, whether through negotiation or a more formal resolution via court. Often time is of the essence, so it is important you seek professional advice as soon as you recognise there is a problem with the service charge.
Our solicitors have many years of experience in this area. For further information and assistance, please contact Mark Blake or a member of the dispute resolution team on 01905 721600 or via email worcester@parkinsonwright.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.