Date 6 April 2009
Another row has started over the level of service charge at the Westfield Shopping Centre in Shepherd’s Bush, West London.
Within weeks of the exclusive new centre opening in October 2008 the tenants were up in arms over what they saw as an unjustified increase in the service charge. Many of the tenants were given an “estimate” of £8.50 per square foot at the time they negotiated their lease, only to see this rise to £14 per square foot by November. It is easy to understand the tenants’ concern when you realise that for some tenants the service charge will increase by £500,000 per year as a result of the revised estimate.
At least two large retailers, including Next, have refused to pay the charge. The Next Group Property Director, Andrew Varley, stated: “Next is not happy with the level of service charges at Westfield, which it views as unreasonable.”
Westfield argue that the charges are justified because the shopping centre was built to the highest specification of any in the UK. This an argument which may have some merit because most service charge clauses will allow the landlord to recover costs that are reasonable and proper – and the most exclusive shopping centre in the country may be entitled to spend more on items such as cleaning and maintenance as they have higher standards to maintain.
However, they should not be charging tenants for costs associated with the build and set up of the centre, and certainly should not be increasing the service charge to cover overruns in the cost of building the centre in the first place (which came to over £1.6bn). The RICS Service Charge Code states that the service charge costs should be restricted to charges and associated administrative costs properly incurred by the landlord in the operational management of the property.
This matter is further complicated because it was the previous owners of the centre that made the original £8.50 estimate. Westfield feel that the estimate was unrealistic and do not feel that they should be bound by it. Whether or not the tenants pay the revised charge could hinge on whether the original estimate is deemed to bind the landlord’s successors in title.
This row may be resolved soon, with Westfield saying that they are yet to calculate the true cost of running the centre, and that the charges may well be reduced in the future. They point to the fact that their centres in Tunbridge Wells, Guildford, Nottingham, Derby, Belfast and Sprucefield have reduced their service charges. Even Next are hopeful of reaching a deal – they are, according to Andrew Varley “in discussions with the landlord along with other major retailers at the centre and hope to resolve the matter amicably.”
Top 5 Tips
If you are taking a new lease there are a number of things that should help to prevent any nasty surprises in your service charge bill:
- Agree a service charge cap at the outset. This will limit the service charge to a fixed amount according to the area of the premises and provide certainty for the tenant. The tenant should be aware that whilst the cap is defined as a maximum, the landlord will usually charge the full amount each year.
- If a cap cannot be agreed, consider clauses that require the charge to be “reasonable and proper”, that require the landlord or manager to deliver “economy and efficiency” or compel the landlord or manager to obtain competing quotes for the work that is to be carried out.
- Set out at the outset what is to be included in the service charge (and make sure that the landlord is obliged to carry out these services). Then set out what will not be included.
- Avoid “Sweeper Clauses” which allow the landlord to charge for additional items at its discretion.
- At the very least, ensure that the landlord complies with paragraph 6 of the RICS lease code 2007 which states “Landlords must, during negotiations, provide best estimates of service charges, insurance payments and any other outgoings that tenants will incur under their leases.”
If you need advice on a service charge dispute, or negotiating the service charge provisions in a new lease SA Law’s Commercial Property and Property Litigation teams would be glad to assist. Please feel free to contact us by telephone on 01727 79800 or by email.
© SA LAW 2009
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