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Caps for tenants

Unlike landlords of residential premises, commercial landlords of retail stores do not have to consult tenants before incurring large service charge costs.

Many retailers will be renting, and therefore will have to pay a tenant’s contribution under a commercial lease.  The level of this contribution, and the services for which the tenant has to pay, are matters for negotiation between the landlord and the tenant.

What is included in a commercial lease?

Commercial leases are commonly drafted to include a list of basic services to be provided by the landlord (such as the cleaning and lighting of common parts), as well as further services that the landlord may, at its discretion, deliver.  In the context of a shopping centre, these additional services may include advertising and general publicity associated with the shopping centre. The tenant is obliged to pay for all services provided, whether or not it really wants them. 

Landlords and tenants often disagree as to what should be included in the list of services. While the landlord wants to be able to recover everything it spends in maintaining and repairing the property, the tenant only wants to pay for those services that it wants to use. 

As a result, tenants’ solicitors often spend a great deal of time trying to reduce the services that the tenant will have to pay for, whilst landlords’ solicitors try to keep the service charge clause as wide as possible so that the landlord can recover everything that it spends, even if it had not envisaged these costs when the lease was entered into.

What is the alternative?

An alternative way of dealing with the ever-increasing lists of services is to include a cap on the tenant’s service charge payment. The cap is generally index linked, commonly to the Retail Prices Index, and increases in line with that index each year. The cap enables the tenant to budget for its maximum exposure in relation to the service charge payment for each year of the lease. 

Whilst a service charge cap is an attractive route for tenants, they should beware of falling into the trap of agreeing to pay a fixed sum, rather than a maximum sum, for the services provided by the landlord. 

Landlords resist service charge caps for fear that they will end up out of pocket.  However, tenants need to be able to budget for their expenditure. The key to ensuring that both parties are satisfied is to set the cap at a realistic level. 




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