Commercial Office Leases

[MrCake]

I'm negotiating a lease with a large landlord in central London for a small amount of office space on part of one floor of a largish building. I have only negotiated a handful of leases before (some commercial, some residential) and this one has something I've not seen before (and neither has my lawyer). The service charge is fixed at the start of each year and that is what you pay, regardless of what the actual costs are. Also, you don't get any statement of what the costs are (either budget or actual) and how they have been allocated to each tenant. We could therefore get a huge rise in service charge and not have anything to review to challenge it.

Any commercial lease experts out there who have come across this before?

[Clitheroekid]

I've dealt with dozens of commercial leases but I've never heard of an arrangement like this. It would be completely unworkable as the landlord could simply impose whatever `service charge' he wanted, even if it was more than the rent.

I can't imagine a landlord - particularly a `large landlord' - would deliberately do this, as it would make the offices unmarketable, and they are usually keen to let space as quickly and easily as possible.

I therefore suspect that the lease does contain some form of mechanism for regulating the service charge, or at least challenging it, and I'd suggest your solicitor reads it through again, or at least contacts the landlord's solicitor to see if he's missed something.

If there really is no such provision it may simply be an error, in which case it's your solicitor's job to amend the lease by, for example, placing a cap on the service charge or on the amount of any increase.

[MrCake]

Clitheroekid,
many thanks for your answer. The landlord is a large outfit with many properties in prime central London locations. I am indeed worried that they could impose whatever increase they wanted (the SC is known for the first year). Apart from no SC accounts there is no mechanism for challanging or regulating the SC and no cap. I have had discussions directly with the landlord's rep and they have confirmed all these points, and simply say that this is normal and there won't be a problem, and that all the existing tenants are on this lease and they won't change it for us. I have offered to pay a higher fixed SC for the duration of the lease, but they won't accept that either. My solicitor is an experienced property lawyer and she said it would be a dealbreaker for her if she were the potential tenant.

My boss's view is that it would be commercial suicide for them to impose huge, unsubstantiated SC rises on us, and that the other tenants have accepted it so it must be ok. I think we should walk away. After all, if they are calculating the charge correctly, there will be a calculation that they can share with us, but they refuse to do this. This makes me think there must be something wrong and I don't want to risk it.

In addition, in the break clause (Y3 of 5) there is no materiality or reasonableness test associated with our compliance with covenants, so we could be denied the break for any small, unimportant breach of covenants (of which there are 40). So we could have a large increase in the SC and great difficulty bailing out of the lease.