Understanding Commercial Service Charges in a Commercial Building

A commercial service charge is a fee that tenants in a commercial building pay to cover the cost of maintaining and managing shared spaces and services. These charges ensure that the property remains functional, safe, and presentable, benefiting all tenants. However, how service charges are structured and managed can significantly impact businesses occupying the space.

1. What Is a Commercial Service Charge For?

Service charges fund the upkeep of common areas and shared facilities in a commercial property. Typical expenses covered include:

  • Building maintenance – Repairs, cleaning, and upkeep of communal areas such as lobbies, corridors, and restrooms.
  • Security and safety – CCTV, security personnel, fire alarm maintenance, and emergency lighting.
  • Utilities and services – Heating, cooling, lighting, and water supply for shared spaces.
  • Facilities management – Costs for property management teams overseeing the day-to-day operations.
  • Insurance and compliance – Building insurance, health and safety compliance, and regulatory costs.
  • Landscaping and external maintenance – Upkeep of car parks, gardens, and building exteriors.

2. How Does It Work?

Service charges are calculated based on a service charge budget, typically set annually by the landlord or managing agent. The cost is then divided among tenants, usually based on the floor area occupied or an agreed formula in the lease.

Tenants typically pay service charges in one of two ways:

  • Fixed service charge – A predetermined annual fee that does not change, offering budgeting certainty.
  • Variable service charge – Costs are based on actual expenses incurred, with tenants paying a proportionate share. This can fluctuate year to year.

At the end of the year, landlords provide a service charge reconciliation comparing actual costs with estimates. If expenses were lower, tenants may receive a refund; if higher, they may need to make additional payments.

3. Who Looks After the Service Charge?

The responsibility for managing service charges typically lies with:

  • The landlord – Responsible for overseeing maintenance and ensuring fair allocation of costs.
  • Property managing agents – Often appointed by the landlord to handle budgeting, maintenance, and service charge administration.
  • Tenant representatives – In some multi-let buildings, tenants may form a group to review and challenge service charge costs.

4. Positives of the Service Charge System

  • Ensures high building standards – Regular maintenance and security enhance tenant experience and protect the property’s value.
  • Predictable costs (for fixed service charges) – Helps businesses budget effectively.
  • Fair distribution of costs – Each tenant pays a proportionate amount rather than individual businesses shouldering maintenance burdens.

5. Negatives of the Service Charge System

  • Lack of transparency – Some landlords may include excessive or unclear charges that only a surveyor specialising in this area of work could understand.