Service Charges in Commercial Property: Disputes, RICS Code, and What Brokers Need to Know

Service charges in commercial property — the mechanism by which landlords recover the cost of managing and maintaining multi-let buildings — are a perennial source of disputes between landlords and tenants. For a CRE broker acting on lettings or renewals, understanding the service charge structure and the RICS Professional Statement is important both for advising clients and for structuring heads of terms.

What service charges cover

In a multi-let commercial building (an office building, retail park, or industrial estate), service charges typically cover:

• Building insurance premiums (or a contribution thereto)
• Management fees charged by the managing agent
• External and common area maintenance and repairs
• Mechanical and electrical plant servicing and replacement
• Cleaning of common areas
• Security
• Landscaping
• Major works reserves or sinking funds

The tenant pays a proportion of the total service charge — usually calculated by reference to the floor area of their demise as a proportion of the total lettable area.

The RICS Professional Statement on Service Charges

The RICS Professional Statement: Service Charges in Commercial Property (1st edition, 2018) sets out mandatory obligations for RICS members and best practice recommendations for the sector. Unlike earlier RICS codes, the 2018 Professional Statement is mandatory, not aspirational.

Key principles:

Transparency — tenants should receive annual budgets and certified accounts. Management accounts should be provided on request. Landlords should not make a profit from the service charge.

Reasonableness — all expenditure charged through the service charge should be reasonable, necessary, and properly incurred. Landlords cannot recover the cost of repairing inherent defects in the original construction.

Sinking funds — the Professional Statement encourages the use of planned maintenance programmes and sinking funds rather than unpredictable major expenditure hitting tenants without warning.

Certification — annual service charge accounts should be certified by a qualified accountant or auditor and provided to tenants within a specified period after the service charge year end.

Dispute resolution — the Professional Statement recommends that leases include a mechanism for independent expert determination of service charge disputes.

Common sources of dispute

Landlord's management fee — a management fee of 10–15% of total service charge expenditure is common in the market. Tenants challenge fees they consider excessive, particularly where the managing agent is associated with the landlord.

Major works — unexpected large expenditure (roof replacement, lift refurbishment, HVAC replacement) causes significant friction, particularly where no sinking fund has been maintained. Tenants argue the expenditure is excessive or the timing is tactically motivated.

Landlord's own works incorrectly recharged — capital improvements that benefit the landlord (modernising the building to increase rental values) should not be recharged through the service charge. The distinction between repair (recoverable) and improvement (not recoverable) is frequently disputed.

Vacant unit apportionment — in buildings with significant vacant areas, who bears the service charge attributable to those units? Standard leases require tenants to pay only their own proportion, with the landlord bearing the vacant unit cost. Some leases allow the landlord to recharge a vacant unit proportion to occupied tenants — a clause tenants should resist.

Heads of terms considerations

When advising a tenant taking a new letting in a multi-let building, consider negotiating:

• Cap on service charge — a fixed cap or CPI-linked cap on annual service charge increases, particularly in the early years
• Exclusions — specific exclusions for major plant replacement, structural repairs, or inherent defects
• Audit rights — the right to inspect service charge accounts and supporting invoices
• Vacant unit protection — confirmation that the tenant will not be required to contribute to service charges for vacant units

When advising a landlord, ensure the service charge provisions are wide enough to recover all costs properly incurred — poorly drafted exclusions can leave landlords out of pocket on legitimate expenditure.

Where AI helps

AI tools can:

• Extract and summarise service charge provisions from a commercial lease
• Flag tenant-unfriendly provisions (e.g., management fee uncapped, no audit right, vacant unit recharge)
• Identify whether the lease provisions align with the RICS Professional Statement
• Draft client notes explaining the service charge mechanism and key risks

AI cannot resolve a service charge dispute — that requires a surveyor, accountant, or solicitor — or certify service charge accounts. But for pre-transaction lease review, it significantly reduces the time taken to identify service charge issues and brief clients accurately.