If you’re a first-time landlord, you may be wondering what service charges are. According to the Royal Institution of Chartered Surveyors’ (RICS) Code of Practice document, Service Charges in Commercial Property – 3rd Edition, service charges “enable an owner to recover the costs of servicing and operating a property from the occupiers, as well as any others who benefit from and use the services and facilities provided.”
Service charges are usually set in the lease. Included in the service charge are the costs of maintenance, repair and replacement of any materials necessary for the day-to-day operations of the property. It only applies to services that are provided in common parts of the building or are enjoyed by all tenants, such as the building’s air conditioning systems.
Service charges should be implemented only to recover the costs of building maintenance. The Code of Practice states the costs that are not included in the service charges. These are the following:
- Any initial costs, including the cost of leasing the equipment, incurred in relation to the original design and construction of the equipment or property
- Future redevelopment costs
- Costs that are matters between the landlord and the individual tenant, such as the costs of letting units, subletting, alterations, rent reviews, consents for assignments, additional opening hours and the like
- Any costs arising from the negligence of the manager or owner
- Any improvement costs above the normal cost of maintenance and repair
- Any setting up costs
Top Reasons for Not Paying Service Charges
There are many reasons that your tenants may not pay your service charges. Here are some of them.
- Can’t afford to pay – Sometimes the simple reason that a tenant cannot pay is that they don’t have the money.
- Demand not received – Another simple reason is that the tenant just hasn’t received the demand for the service charges.
- Dissatisfaction with the quality and level of work undertaken – Sometimes tenants have disputes with the quality and level of work that the landlord undertakes regarding the development of the property. If the tenants feel that the work that the landlord does is subpar or even unnecessary, then they may withhold payment until they get proper answers.
- Demand for service charges is not compliant – The demand for service charges must be accompanied with summaries of tenants’ rights and obligations. If your demand isn’t compliant with sections 47 and 48 of the Landlord and Tenant Act 1987, tenants can withhold payment until they receive a demand that is compliant.
How to Avoid Non-Payment of Service Charges
How do you keep tenants from withholding the payment of their service charges? Usually, these issues arise from a lack of transparency and, sometimes, miscommunication between the landlord and tenants. Here are some ways you can avoid these non-payment situations:
- Maintain open communication with tenants.
- Ensure that your service charge demands are compliant.
- Consider offering a payment plan for tenants who cannot afford to pay service charges.
- Make sure you fully understand each lease and that your service charge demands are in accordance with the terms of each lease.
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