As our colleagues have previously highlighted, service charge and common cost regimes are increasingly under the spotlight for both landlords and tenants. Landlords want to guarantee full recovery of all their expenditure on common services, whilst tenants want to ensure transparency and budget certainty.
One way that a tenant can achieve this is through an annual service charge cap – where a tenants' service charge or common costs liability is limited to a pre-agreed figure in each service charge accounting year, even where their liability could be more than that sum under the lease.
The merits of this approach from a tenants' perspective are clear but careful consideration should be given to other situations in which common costs may be payable under a lease to ensure that the cap encapsulates these scenarios.
Key considerations
1. Title Conditions – A tenant is usually required to comply with any conditions and restrictions affecting the landlord's title to a property. Where a property forms part of an estate within a wider development, there may be a Deed of Conditions or similar title agreement in place obliging the owner/occupier of the leased property to contribute towards the maintenance and repair of this wider development, in addition to the service charge regime relating to the smaller landlord estate.
A landlord will want to pass on any common costs that they are required to pay or contribute to their tenant. Whilst this is not controversial, consideration should be given as to whether such common costs are caught by an agreed service charge cap. If this is not properly considered at the outset, tenants may find themselves required to contribute to unanticipated costs over and above the agreed fixed cap level.
2. Statute – If the leased property forms part of a tenement building, there may not be an express service charge regime detailed in the lease. The allocation of common costs payable by the owner/occupiers of that building will either be set out in the title deeds or, if not, governed according to the Tenement (Scotland) Act 2004. In this scenario, the protection afforded by a service charge / common costs cap may be overlooked.
As with title conditions, a landlord is likely to expect the tenant to contribute to any costs payable by the owner of the property in respect of the wider building. While this will often relate to minor maintenance and repairs to common areas, a landlord may also seek to pass on to the tenant any extraordinary costs which may arise during the period of the lease, such as major repair works to, or the replacement of, the tenement roof - which could result in a large unanticipated and uncapped outlay on the tenant's part.
Tenants should therefore always consider the statutory repair obligations when taking a lease within a tenement building and ensure that they carry out a survey of the building so that they are alert to any potential common liabilities which they may want to cap.
3. Green clauses – With sustainability of buildings continuing to be high on the agenda, landlords are increasingly looking to improve the environmental performance of their bricks and mortar.
The terms of a lease may permit a landlord to recover a proportion of these costs from the tenant on an ad hoc basis out with the service charge regime, exposing the tenant to potentially significant liability This can be particularly concerning for tenants who only have a short duration lease and who will not benefit from the improvements made over the longer term.
Consideration should therefore be given to ensuring that any agreed service charge cap covers costs payable by a tenant in relation to green clauses in a lease.
Conclusion
Service charge caps are increasingly common and provide a significant benefit to tenants. Tenants should however always be alert to other circumstances in which they may be deemed liable for common costs which fall beyond the scope of the protection offered by a service charge cap. Identifying other potential costs at the outset will enable parties to engage in discussions in advance and avoid any unpleasant surprises further down the line.
Please get in contact with either Danny George or Emma Barnett in our retail and leisure team if you would like to discuss any Scottish commercial leasing matters in more detail.
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