Balancing the interests of landlords, residential and commercial tenants presents particular challenges when imposing a service charge regime on mixed-use development. The service charge regime requires careful consideration on site set up. Complications arise because of the contrasting levels of statutory intervention in residential and commercial sectors and recently the inception of the Building Safety Act 2022.
What is critical from a landlord's perspective is to ensure that any regime allows full service cost recovery and avoids unnecessary administrative complications and expenditure. Commercial tenants will be focussed on keeping their costs to a minimum, whilst ensuring the building is well maintained and attractive to customers.
Some of the issues that require consideration include:
1.Type of services
Residential and commercial tenants will invariably require the benefit of different services. Parties should consider which services will be provided and which services will benefit, or be used by, each of the occupiers and set these out clearly in the relevant leases. Landlords would be well advised to try to keep the commercial and residential regimes separate so as to avoid a cross over between them, although this is notoriously difficult in practice.
Tenants will be very keen to ensure they are not required to make any contribution to the cost of services which will not benefit them
The parties will need to assess which services are mandatory and which will be discretionary. If any are discretionary, what are the circumstances in which the landlord can include them?
2.Apportionment
The method of apportionment of service charge costs between residential and commercial tenants in a mixed-use building will require careful consideration.
Landlords should be very wary of the potential to create shortfalls where for example, a commercial tenant is not required to pay for a service (because it won't have use for it) and the residential contribution is based on floor area, as a ratio of the building as a whole.
The service charge schedule drafting should be clear to avoid disputes.
3.Guidance
There is a raft of guidance from RICS that considers best practice managing service charge regimes in mixed use developments and commercial leases and it would be wise for those tasked with drafting or negotiating a service charge regime to be mindful of the guidance. This includes:
- RICS Professional Statement on Service Charges in Commercial Property (1st edition; September 2018);
- Managing mixed use developments (1st edition);
- Commercial Property Management in England and Wales (2nd edition).
4.Potential disputes
Service charge recovery is a fertile source of dispute. Careful consideration of the service charge regime at the outset of the lease negotiation could avoid a potentially costly service charge dispute.
