• 10 AUG 15
    How restrictive are service charge clauses?

    How restrictive are service charge clauses?

    Daniel Long, Partner and Head of Commercial Property Dispute Resolution at WHN Solicitors, considers a common area of contention between commercial landlords and tenants.

    Often where there are multiple tenants within a particular building or development, the landlord of that building or development will be under an obligation to carry out certain services relating to the common parts. Examples include shopping centres, retail parks, office buildings and blocks of flats.

    The services may include cleaning, gardening, managing, insuring and marketing to list but a few. The services will usually be tailored to the specific site in question and the needs of the tenants. As the services are generally provided for the benefit of tenants, it is the tenants that will usually be required to contribute to the cost of those services pursuant to the lease.

    In these circumstances, the leases will contain provisions dealing with how the service charge is to be calculated each year, how it is to be charged, whether it is capped and what services the landlord must carry out. Disputes invariably arise where a landlord and tenant do not agree that a particular head of expenditure is recoverable under the lease.

    Historically, service charge clauses have been interpreted very restrictively with the effect that landlords would face difficulty recovering any challenged costs relating to services not expressly included in the lease, even where there has been a wide sweeper clause.

    However, the recent Supreme Court decision in Arnold v Britton has possibly opened the door to a more flexible approach to the interpretation of service charge clauses moving forward.

    Whilst the Arnold v Britton case will perhaps be remembered for the fact that the court was unwilling to interfere with a service charge clause meaning that tenants would be paying a hefty £550,000 per annum by 2072, the case does also address some useful points concerning the interpretation of service charge clauses.

    The Supreme Court upheld the view taken by the High Court that there are no special rules of construction requiring service charge clauses to be construed restrictively and the usual principles of interpretation apply. Whilst the written words of the lease will always be the starting point when it comes to interpretation, the Supreme Court determined that the wording should be examined in its context against all admissible background and taking into account the commercial purpose of the relevant clause.

    Over time, case law will tell if this decision has an impact on a landlord’s ability to recover the costs of services not expressly referred to in a lease. It does however suggest a shift in how the courts will approach such issues and landlords are likely to have greater scope to raise wider arguments concerning reasonableness and commercial purpose.

    It would be prudent for tenants to consider whether any services carried out by their landlords may not be recoverable. The extent of any sweeper clauses and the landlord’s ability to vary the services will need to be considered. Tenants may well be entitled to certain credits.

    Landlords should seek guidance if they are unsure as to whether they will be able to recover the cost of carrying out a particular service or if they require legal assistance in attempting to recover service charge arrears generally.

    To find out more about service charges or any other landlord and tenant dispute, call the experts on 0161 761 4611 or email Daniel Long daniel.long@whnsolicitors.co.uk.