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Both pharmacy landlords and pharmacy tenants should always be alert to the service charge they levy or pay under the terms of their leases.
A recent case (Friends Life Management Services Limited vs. A & A Express Building Limited) was a useful reminder that a tenant’s liability to pay service charge for works the landlord is proposing to do does not permit the landlord to charge the cost of works to be incurred after the end of the lease.
The tenant had rented office and parking facilities for 15 years expiring in March 2013. The tenant successfully exercised a break clause ending its lease earlier in March 2010.
The lease required payment of a fair proportion of sums already incurred or anticipated during future service charge periods. There was no specific reference to a reserve or sinking fund in the lease.
The service charge year under the lease ended in December of each year and the landlord was undertaking a programme of extensive works to the building costing in excess of £1,000,000.
These works were carried out between 2010 and 2011.
The dispute revolved around whether the tenant should be liable for the full cost of the works for 2010 and 2011 despite the fact that, when the lease ended, some of the works had not been carried out or paid for by the landlord.
The tenant argued that it should only be responsible for costs incurred up until the time that it had terminated the lease in March 2010.
The court will usually look very carefully at the wording in the lease to ensure that it correctly interprets the intention of the parties.
The court was not prepared to allow the landlord to retain anticipated service charge costs where the related expenditure had not been incurred during the last service charge period of the lease, even though the lease envisaged recovery of future costs.
If the lease had made specific provision for a reserve and sinking fund to be set up and for anticipated service charge costs to be applied towards that fund the court may well have reached a different conclusion.
Pharmacy tenants should therefore carefully check the sums that they are required to pay to make sure that they are not overcharged.
Both pharmacy landlords and pharmacy tenants would be well advised to ensure that:
On a related note, pharmacy landlords who have leases with service charges should be aware that the new third edition of the RICS Service Charge Code came into effect on 4 February 2014 replacing the second edition with immediate effect.
This code sets out the best practice to be adopted when dealing with service charges in leases. The purpose of the code is to achieve better communication, transparency, timeliness and proportionality when dealing with service charges.
It is not legally binding however tenants can request for it to be referred to in their leases, which would make it binding on the parties to the lease.
An important change brought about by the third edition is the treatment of sinking and reserve funds.
A sinking fund is defined as a fund in which money is set aside for the eventual replacement of a wasting asset (usually plant and machinery) and reserve fund relates to future costs of regularly recurring maintenance and upkeep.
The code recommends that regular advance payments be taken from each of the successive tenants for reserve/sinking funds, so that whoever is occupying the property when the asset needs replacing does not bear the whole cost.
The fund should be held in a separate account so that the money is not used to meet the landlord’s debt should they become insolvent.
This article was written by Claire Timmings.
For more information please contact Claire on +44 (0)1483 252582 or email@example.com.