Member Article

Lack of understanding on service charges can lead to budgeting problems

Tenants who do not take the time to understand their service charges before signing a lease are risking unexpected costs, according to chartered surveyors Sanderson Weatherall.

Experts at Sanderson Weatherall believe there is a lack of understanding of service charges, particularly among smaller companies and private individual tenants. Many such problems arise from reliance upon advisors, who sometimes do not give sufficient explanation of their obligations in sufficient detail to allow them to plan financially.

Chris Dixon, a Partner at Sanderson Weatherall, handles service charges on contracts for client of the firm’s Tees Valley and Tyneside offices. He said: “Recently, there have been calls for tougher regulation on service charges, with suggestions of inconsistent and opaque practices, but the greater problem is a lack of understanding of obligations on behalf of the tenants.

“The way in which service charges are handled is set out within the lease of the property, but a poor appreciation of what is involved and what costs can be expected can often lead to tenants being unable to plan their finances properly.”

Whilst tenants should make the effort to fully understand service charges, a Royal Institution of Chartered Surveyors code of practice means the onus is largely on landlords to make things transparent.

Chris said: “As leases have become more standardised over the years, these provisions tend to be similar in most commercial properties, albeit perhaps not identical. The tenants are protected by the fact that most leases, plus the RICS code of practice, stipulates that the landlord must provide a budget of expenditure prior to the commencement of the service charge year.

“The tenant should also receive a fully itemised year end account at the year-end that lists all expenditure. Any major differences between the actual and budget expenditure should be explained. The tenant can also ask to inspect all the expenditure invoices.”

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