Member Article

Delaying Repairs ? Effect on Service Charge

With Watson Burton LLP Law Firm

Service charges in commercial leases are, unlike residential leases, free from statutory regulation. They are an entirely contractual matter and as a result are often a source of much contention.

In the 2007 Princes House Limited and another v Distinctive Clubs Limited case the claimant landlord leased a building consisting of four floors and a basement to various tenants. The basement was leased to the defendant tenant.

Under the basement lease the landlord agreed to use all reasonable endeavours to repair and replace the roof of the building subject to the landlord being notified about the need for repair. The tenant was required to contribute towards any costs incurred by way of a service charge which was subject to a cap which was in place until the end of 2003.

Works were required to the roof in 2001 and the intention was for the remedial works to be completed in 2003. The work did not start until 2004, being completed in 2005. No explanation was given for the delay and the tenant was invoiced for amounts additional to those previously estimated. The tenant only paid contributions due to December 2003, arguing that if the works had been completed as originally scheduled it would have received the benefit of the 2003 cap. The landlord brought proceedings for non payment of service charge instalments.

The Court held that the landlord had failed to comply with it’s obligations to use all “reasonable endeavours” to maintain the roof; the works could have been completed by the end of 2003. The tenant should, as a result, have received the benefit of the capped service charge. Even though the tenant had not notified the landlord about the need for repairs, the landlord was still required to comply with his repairing obligations. In any event, the landlord had waived the notification requirement by indicating that it intended to carry out the work.

As a result, the tenant could recover the relevant element of the service charge in respect of the work.

Service charge provisions continue to be a great source of contention. This is despite the existence of industry guidance in the form of the RICS code of practice which promotes good practice and improved relations. The objectives of the code are to:

• Prevent services charges being an area of conflict;
• Deliver service charges that can be accurately forecasted and budgeted for as part of occupiers’ overheads;
• Ensure service charges are “not for profit, not for loss”; and
• Encourage transparency and communication over service charges

The problem appears to be that such guidance is exactly that. Parties are not obliged to comply and service charge provisions continue to be dependant on the negotiating skill and commercial strength of the parties. It is therefore vital that parties think carefully at the outset about the extent of their liability and ensure that the lease is an accurate reflection of their intentions. Obtaining cost information for previous years may assist in ascertaining future liabilities as may asking whether any substantial works are contemplated in the foreseeable future.

If you have any questions on this article or any other property matter, please contact Sarah Barratt at Watson Burton LLP at sarah.barratt@watsonburton.com or on 0191 244 4290.

This was posted in Bdaily's Members' News section by Ruth Mitchell .