What are the service charges in commercial property?
The ownership or management of a commercial property has its own specific costs and charges associated with it, most notably the service charges which are required specifically for commercial property.
The subject of a commercial property service charge is often contentious between a commercial landlord and tenant. Each party may have differing views of what is an acceptable state of repair and who is responsible for maintenance, so it is essential to be aware of what you are liable for as a commercial landlord.
What is a service charge?
Much like residential property, a commercial service charge is simply a means by which a commercial landlord can recover the costs of maintaining and repairing the property – where required – from the tenant.
The service charge can also cover the cost of certain services associated with a commercial property.
What does a commercial service charge include?
The specifics of a service charge will vary from property to property, but they may include:
- General repairs (which may include structural repairs)
- Refuse and waste collection
- Air conditioning
A service charge may also cover:
- Staffing costs – including property management fees
- Insurance costs
Commercial service charges should only be applied for the recovery of costs associated with property maintenance and repair.
For larger maintenance or repair works, tenants are provided with several quotes to compare before a contractor is hired to complete the necessary work. Work will usually only commence once tenants have had the chance to review and feedback on the quotes.
Any major improvements or renovations should be excluded from a commercial service charge and instead recovered through a sinking fund.
What is a sinking fund?
A sinking fund is a set amount of money that is specifically set aside to cover any major repair or maintenance work which may be required on a commercial property in the future.
Common with leasehold properties, sinking funds are managed via the service charge associated with the property, which each leaseholder is liable to pay. The cost of the contribution to the sinking fund is typically calculated as a fixed percentage of the total service charge.
Contributions are held ‘in trust’ in an interest-bearing account until the funds are required.
A sinking fund can also be set up by a private commercial landlord. They simply need to put aside a set amount of the rent they receive from the commercial property each month, often between 2% – 5%.
If a landlord operates a sinking fund, they should ensure they handle contributions separately to any service charge contributions.
Sinking funds are used to cover the cost of repairing:
- Communal lighting
- Footpaths (where applicable)
- Access roads (where applicable)
Commercial service charges should only be charged for services that are provided to communal areas of a building, or for services that all tenants benefit from such as heating or air conditioning.
Maintenance services which only benefit a single tenant – such as the cost of cleaning their sole area of a commercial property if there are several tenants – are the responsibility of the individual tenant and should not form part of the overall service charge.
For advice and assistance in all matters of commercial property management, sales and purchases, just get in touch and our expert team will be happy to help you.