Common cause of dispute

Service charges are sums levied by landlords to their tenants in order to recover the cost of providing various services to their buildings and common areas of a site.  For example, the provision of security guarding, cleaning and landscaping of the common areas of the site, which all occupiers benefit from.  Best practice guidance is set out in the RICS Code of Practice for Service charges in commercial property (3rd edition, January 2014).  The aim of this guidance note is to ensure transparency surrounding service charges and reduce the likelihood of disputes between landlords and occupiers, which in turn encourages occupier retention.

The RICS guidance note states that “the basis and method of apportionment should be demonstrably fair and reasonable to ensure that individual occupiers bear an appropriate proportion of the total service charge expenditure that clearly reflects the availability, benefit and use of services.”

The traditional method of apportioning service charges is to calculate the charge on a percentage of the total lettable area of the landlord’s total building, property or site, albeit the lease will confirm the basis of apportionment in most cases.  However, not all service costs and benefit to occupiers will increase proportionately with floor area, particularly where there is a wide variety of unit sizes within a development.

Weighted floor areas

On several business park sites managed by Lambert Smith Hampton (LSH) we have reviewed each site on an individual basis and, where there are large variations between plot sizes, a weighted floor area has been applied.  This weighted floor area method progressively discounts larger building or plot areas, as it takes into account the fact that a unit’s floor area may not directly correlate to benefit from and use of site services.

There is no set formula for calculating a weighted floor area and it is ultimately at the discretion of the landlord and their appointed surveyor.  For example, on some of the sites managed by LSH, it has been considered fair and reasonable to apply the progressive discount to all buildings or plot sizes above 20,000 sq ft.  By way of an example, a 30,000 sq ft unit would have a weighted floor area of 28,000 sq ft, whereas a 300,000 sq ft unit would have a weighted floor area of 112,000 sq ft, thereby contributing just four times the service charge of the smaller unit despite it being ten times the actual size.

Fair and reasonable approach

Taking this approach would be of specific interest and benefit to those occupiers who require particularly large space, such as department stores in shopping centres or a large logistics firms on a business park.  However, the service charge code is also clear that weighted floor areas should be used as a fair and reasonable basis for apportionment and that they are not a concession which can be negotiated.

As occupiers look for ways to offset rising occupational costs, service charges will inevitably come under more scrutiny. It is therefore essential that the landlord and their managing agent are transparent and that the service charge apportionments are reflective of the individual occupiers’ benefit of the services provided.  By calculating service charges on a weighted basis for certain sites, occupiers can be assured that the service charge is fair and reasonable and reflects their benefit from the services, which in turn, creates a sense of added value, thereby aiding tenant satisfaction and retention.

For more information or for a detailed review of your service charge provision, please contact Davina Blandford.