Watts Service Focus

Dilapidations and service charges

Where tenants have been occupying multi-let premises, dilapidations claims at lease end can be further complicated by service charge issues.

Both landlords and tenants should always seek professional advice when negotiating dilapidations claims at the end of a lease term. This is particularly the case where buildings and estates are multi-let and service charge considerations come into play.

Where multi-tenanted commercial buildings are concerned, service charge provisions should be run on a ‘not-for-profit, not-for-loss’ basis. A number of issues should be taken into consideration.

Is the landlord / managing agent correctly applying and managing the service charge? It is important to know and understand the terms of the lease so that tenants are aware at the outset of the way in which service charge is allocated. For example, should a ground floor occupier have to contribute towards the maintenance of a lift from which they gain no benefit? Clear wording of leases is essential: if costs under the service charge are clearly set out in the lease clause then the tenant has to pay.

Other aspects are less clear cut and will not always be spelled out in the lease. For example, can a service charge be used to improve a property or just to maintain it in its existing condition and what impact does this have on dilapidations at lease expiry?

Sub-letting is also an issue for both parties to the lease and can make dilapidations settlements far from straightforward. Where sub-tenants continue their occupation after a head-tenant’s lease has ended, it may be questionable whether or not a landlord can recover dilapidations from the sub-tenant in question and, if not, has he suffered a loss? Are new lease terms agreed at different rents or have service charge caps been implemented – particularly in regard to mechanical and electrical installations.

These and other issues relating to service charges, make dilapidations in certain leasing scenarios a grey area that may require advice from experienced consultants to unravel. The RICS has recently published the latest edition of its Code of Practice for Service Charges in Commercial Property, which sets out best practice for the administration and management of all types of non-residential property. However, if landlords or tenants have issues arising from service charge payments that are not easily resolved, professional advice should always be sought.

For more information, contact Ian Laurie, Director at Watts Group on 0161 831 6180.


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