If you are going to be leasing a unit in a building, the likelihood is that the landlords will carry out all the important works, such as repairing the structure and exterior of the building, lighting and decorating the common parts, and insuring the building against fire and other risks. This makes sense because these are things which matter to everyone in the building, and which can’t effectively be dealt with individually by tenants within their units alone.
Traditionally, all these expenses are paid for by the tenants of the various parts of the building. Each pays a share of the costs, usually based on the size of their units. This arrangement is a “service charge”.
You should check that the landlords will pay their share for any un-let parts of the building, as if they were its tenants, and that the other tenants all pay service charges, calculated on the same basis as in your lease.
The lease will set out exactly what items and costs are to be included in the service charge. You would expect to see the cost of maintaining and decorating the exterior and common parts of the building, carrying out structural repairs, maintaining communal boilers, lifts, and other plant and machinery which provide services to the building.
Service charges are usually divided between years – either calendar years, starting on first January, or on another date in the calendar. The exact expenses incurred in that year cannot be calculated precisely until afterwards – just like calculating the annual accounts of any business. But the landlords are not going to finance all the building’s expenses for over a year. The lease will allow them to assess an interim charge, usually paid on the quarterly rent payment dates specified in the lease. The final accounts are relegated to calculating any final adjustment, one way or the other.
Since the landlords may have to pay the insurance premium on the building in a single payment, they may charge the due proportion to you as a single payment, rather than spreading it over four quarters.
The services which, when performed, will result in the annual service charge may coincide with the obligations the landlord undertakes in the lease. But not always. The service charge clauses in the lease may list a whole series of potential service charge items ((like I did in a previous paragraph) but that may not be the same as the list in the landlords covenant to carry out repairs. In other words, the landlord may not be obliged to provide all the services. So, it’s best to specifically check that the landlord has to provide all necessary services.
You don’t want this to go too far, though. If you have a relatively short lease term at the premises, you you do need an obligation on the landlord to repair the roof if it’s leaking, but you don’t want the obligation to go so far as replacing the whole roof. That would benefit the landlord for years to come, but you only for a short period. So you should about wording which requires you to pay for the cost if the landlord “repairs and replaces” parts of the building – e.g. the roof – or plant and machinery – e.g. the lift.
In fact, it’s very worthwhile having a surveyor inspect the building in the light of the list of possible service charge items in the lease and to report back to you on possible eye-watering items. For example, replacing the lift or the boilers.
In some circumstances, the landlords may be prepared to put a cap on the service charge, meaning that the amount you can be asked to pay in any period has a limit on it. That way, the landlord is also contributing from its own resources for unexpectedly large items of expense which the landlord wishes to carry out – that new lift or new roof.
The guiding principle is that it may be reasonable to pay for repairs, but not for improvements. You don’t want to take a unit in a relatively dilapidated building and then discover that the landlord is able to refurbish and upgrade it to a spanking new condition, all the time charging the cost to the tenants.