Recovering costs through service charge
27 January 2017
As a landlord you may want to recover the costs of maintaining your investment properties from tenants via a service charge. Tenants are usually happy to pay for this, unless they think the landlord is trying to improve the property at their expense.
Most tenants will insist that the service charge clause in their lease contains a list of excluded expenses, which will invariably include improvements. Where does that leave landlords of older properties that were built with materials and equipment that are now out of date?
Repair or improvement
Repair generally means restoring or renewing parts of something, rather than the whole, but a court will take into account a range of other factors, including the nature and extent of the defect and the nature and cost of the proposed works. The key issue for the landlord is to establish that replacing what is there with a modern equivalent falls within its repairing obligation. There are a number of factors that may help:
- The landlord must be able to demonstrate that the part of the building or piece of equipment they want to replace has deteriorated to the extent that some action is necessary. Something that is outdated but still functioning will not qualify.
- Most leases will help the landlord by also referring to replacement or renewal, often ‘where beyond economic repair’.
- Modern building regulations may require different standards. In 2010 the Upper Tribunal of the Lands Chamber held that replacing single-glazed windows with double-glazed ones came within the definition of repair. One of the deciding factors was that the building regulations at the time required double-glazing, so installing anything else would have been unlawful.
The Royal Institute of Chartered Surveyors code of practice on service charges in commercial property was introduced to standardise best practice. It tends to be thought of as favouring tenants, but it contains a section on replacement and improvement that could be of real help to landlords. It takes into account the relevant law but focuses more on the commercial impact of service charges on landlords and tenants. It points out that replacing old, worn-out parts of a building or its equipment with modern equivalents may reduce running costs, saving tenants money in the longer term. The practical advice is that landlords who discuss the cost/benefit analysis of any proposals with tenants are more likely to win the argument that replacement is the better option.
Lease expiry date
If the landlord is obliged to act reasonably, it will have to take into account the length of the relevant leases. In one case, the court decided that a tenant with only a few months left of a three-year lease could not be asked to pay for a replacement of the roof, but should only pay the cost of patching it up. Every situation is different, so landlords should seek legal advice early on.
A relatively new question is whether the cost of works that improve the environmental performance of the building can be recovered through the service charge. From 2018 it will not be lawful for landlords to grant a new lease of any property that does not have an Energy Performance Certificate grade of at least E. Well-advised tenants will be wary of landlords trying to recover the cost of upgrades through a service charge. If the landlord is replacing something that is no longer functional, the costs may count as repair and the principles already discussed will apply. In practice though, the commercial approach may again be the most successful. Tenants may be more willing to contribute to energy-saving improvements if the landlord can show that the proposed work will reduce energy consumption, and save them money, in the long term.
For more advice about service charges or any other commercial property issue, please contact Olu Jatto, landlord and tenant lawyer at Myers & Co Solicitors on 01782 577000 or email firstname.lastname@example.org.
The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.