Refurbishment of Common Parts
A key point to look out for in service charge expenditure is the cost of "renewing" or "refurbishing" items in the common parts of the landlord's estate.
There is a risk that Landlords could use these provisions as a means of upgrading their estate at the expense of the tenants.
Such expenditure could be quite disproportionate to the tenant's interest in the estate, especially if they have a relatively short-term lease.
It is therefore advisable to request that such heads of expenditure be either deleted entirely or limited to circumstances where items are "beyond economic repair".
Careful attention also needs to be paid to whether drafting the service charge provisions allows the landlord to refurbish the estate simply because they consider it desirable or only in circumstances when there is a genuine need for repairs.
Service Charge Caps
To provide certainty for tenants, landlords may agree to apply a cap on the service charge payable under a lease.
However, in recent times there has been increasing pushback from landlords in respect of service charge caps.
Soaring energy costs, inflation and labour costs have largely driven this shift.
Landlords do not want to be liable for the excess costs if the service charges exceed the agreed service charge cap.
Tenants may be exposed to significant service charge increases from year to year where no cap is in place, and there may be some debate as to what is a "fair and reasonable" service charge proportion in the circumstances.
If the tenant's proportion of service charge cannot be agreed between the parties, then the lease will often provide for the dispute to be referred to an independent expert for determination.
Energy Efficiency Improvement Costs
"Green lease" provisions are now commonly included in leases and often specifically feature in the service charge provisions.
These provisions aim to monitor and, in some cases, actively carry out improvements to increase the energy efficiency of the estate as a whole.
It usually comes down to a commercial negotiation between the parties as to which costs the tenant will agree to accept in the service charge provisions and how extensive the potential expenditure may be.
Tenants need to consider the long-term cost benefit of agreeing to be responsible for energy improvements and if such expenditure will bring the overall utility costs down for their premises or the estate.
The implementation of energy efficiency improvement measures may be part of tenants' Environmental, Social and Governance ("ESG") goals, and with an increasing focus on such matters in recent times, it is expected that tenants are more likely to be accepting of such provisions going forwards.
Tenants may also be willing to share energy consumption data to assist with the landlord's energy efficiency initiatives; however, there will be an administrative cost and burden attached to this, and tenants should consider these points carefully before agreeing to participate.
Service charge provisions are increasingly important in the current financial climate, and we recommend thoroughly reviewing and negotiating them.
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