Services & Charges
Overview
In the absence of specific clauses, there is no obligation on a landlord to provide services or for a tenant to pay for them. However, in certain situations, it may be implied by necessity that certain common part services are provided, for example in a letting of part of a building. It is desirable that the matters are formalised in a letting lease or letting agreement.
In the case of a building with multiple units, each distinct unit will be held under a long lease. There must be easements and rights of support and shelter for the unit, from the rest of the building. There will also be easements to use the common parts, as the nature of the unit and building requires. The landlord or a management company is obliged to maintain the common parts, both internal common parts and structure.
A property may be part of a block, such as an office block. In this case, it is not possible to apportion or allocate the repair and maintenance of the building to individual units. It is necessary that each lease lets only the internal part of the unit e.g. the internal envelope of the particular unit, to the owner or tenant. The structure, including the structural parts, must be retained in the ownership of the landlord and management company so that they can maintain and manage them.
Where a property is part of a larger structure or benefits from privately managed external areas, it is necessary that the owner or tenant pay a service charge for the purpose of financing the management, maintenance and repair of the common parts or common areas. Where such property is owned, it will usually be held under a long lease, which incorporates provision for service charges. In the case of property let at a market rent, the property is usually held under a shorter lease, providing for both payments of a market rent and a service charge.
Leasehold Covenants
There are legal limits on the effectiveness of freehold covenants (although they have been liberalised in 2009). Therefore, units that compromise part of a larger building, are usually held by way of long lease. A long lease can create the conditional ownership that is necessary to make the management scheme work. In effect, each owner’s ownership is conditional upon complying with obligations which are provided for the benefit of the entire building or structure
A lease is the most effective way of creating conditional ownership. If the unitholder is the economic owner of the property, the lease will be a long lease at a nominal rent. If the unitholder is a commercial tenant, paying a market rent, then the lease will be a shorter lease at a market rent. The unit may be held by an investor by way of a long lease at a nominal rent. This investor may then sub-lease the unit, by way of a commercial lease at a market rent, passing on the obligations in respect of service charge and common parts obligations to the tenant.
Where the unit is owned, the owner may hold it under a long lease or as freehold owner. The entire unit will usually be included, in the case of a stand-alone unit is let. There may be a shorter term lease of the unit at a market rent or a long-term ownership lease at a nominal ground rent, which provides for the contribution of service charges towards the use of the common area.
There may be freehold (unconditional) ownership of the unit itself, but there may be a separate lease of the easements over the common parts. The easements confer the rights to use the common areas. Although the unit is held for unconditional freehold title, the right to use entrance roads, access roads, etc. are leased and conditional upon compliance with obligations in the lease of easements, including, in particular, the obligation to pay a service charge.
Easements and Covenants
The rights and easements granted to unitholders will usually include rights of access for persons and for services such as water, sewage disposal, electricity, gas and signals through pipes, and wires. There will be physical rights of access for vehicles and persons, as required, over the common parts.
There may be rights for the unitholder, its employees and customers, to use the external and internal common parts and use and enjoy the common facilities. There may be a right of access to adjoining premises to repair and maintain the service lines.
In some types of building, there may be a right to use common facilities within the building, such as hallways, toilets and shared a common kitchen. In an industrial park, it may include the right to use the roads, footpaths, services, etc.. In a shopping centre, the common facilities, would be broader and, for example, include, the right to enjoy a range of services.
Management
The management company will undertake in the lease of each unit, to manage and maintain the common parts and areas. This may apply both to the internal common parts such as hallways, external common parts such as roadways, car parking areas, etc. as wells as the structure of the building itself (the foundations, roof, structural supports of the building etc.).
In the case of a shopping centre, the management responsibilities are wider again. It will be responsible for management and maintenance of internal and external common areas, shopping malls, etc. and the shopping centre structure itself. However, it may play a wider role in providing facilities for customers e.g. crèches, trolleys, toilets. It may go further, and undertake promotional and other activities on behalf of the shopping centre as a whole.
Service charges may apply to a wide variety of property types. For example, in an industrial estate, each unit may be a stand-alone building with its own land. However, the management and maintenance of the common internal roadways, lighting and the footpaths within the industrial estate, may not be the responsibility of the local authority. In this case, there must of necessity be a service charge, in order to finance the management, maintenance and insurance etc, of the common areas
Service Charges
The management and maintenance of the common parts are financed by way of a service charge. Service charge provisions may arise, irrespective of whether the unit is “owned or rented”. In the case of a development with common areas, it will be necessary for the owner to contribute to a service charge for the maintenance of common facilities.
Common parts may comprise the internal common parts of a building or external common areas, such as a car park or access road. Because a building structure cannot be segmented, the only workable mechanism is that the common parts are vested in and are the responsibility of a landlord or management company.
The mechanics of the service charge will be set out in the lease of the property or the lease of easements. Everything depends on the wording of the lease. The service charge provisions may operate unfairly if they are not carefully drafted from the outset. The lease will determine the services which must or may be provided. It will set out a mechanism for the ascertainment of the of the level of charge and provide the landlord’s power to charge.
Charging Mechanism
Service charges provisions usually provide that in each year, the manager, be it a management company, landlord or managers on their behalf, prepare and provide a budget of likely expenditure. Generally, it is provided that advance payment is levied and invoiced, in either one or several (half-yearly, quarterly or monthly instalments, for the estimated expenditure sums attributable to the units.
At year-end, there is usually provision for the ascertainment of the actual expenditure incurred, with or without an audit or other verification. The landlord’s surveyor or manager may have a role in determining disputes or apportioning fair and reasonable costs for services. It is generally provided that if there is a shortfall or overpayment relative to the budget, that the shortfall or overpayment is credited or debited against the following year’s budgeted service charge.
The apportionment of service charge between units will be determined by the leases. Commonly, apportionment is made on a floor area basis. However, where more complex buildings are involved, there may be given weightings for different types of unit and different areas within the development (e.g. mezzanine areas are commonly discounted). The general principle is that the apportionment should be fair and reasonable, relative to the use of services.
Management Company
The management company which may own and hold the common parts should be distinguished from the manager, service provider and management company which actually runs the common area. The management company in this latter sense is usually a property managing agent, with whom the landlord or management company has contracted for the provision of the management services. This latter company provides management services on a contract basis to the landlord or management company which holds the parts.
Generally, on completion of a development, control of the common parts will pass them to a management company. The management company in which the common parts are vested will usually be a special purpose company. Commonly, although not invariably, the owners or commercial tenants of the units will be the shareholders in the specially incorporated company.
Organisation of Management Company
Company law provides a mechanism by which the shareholders can have input into the management company which itself maintains and takes decisions, retains ownership of the common parts and has the responsibilities to undertake maintenance and management of the common parts.
In other cases, the owners will have no say in the management company which will be retained by the original developer. The structures should be considered carefully in buying into or taking an existing lease on a new unit at the unit in a private managed area, private estate, shopping centre, building etc from the perspective of the degree of control or risks that the landlord may not properly manage the common parts.
Where the development consists of or included residential units, the Multi-Unit Development Act provides mandatory protections for lessees. The developer is severely restricted in retaining the common parts. There are significant obligations on the developer. See our section on the Multi-Unit Development Act.
Service Charge Issues I
There is the risk that the service charge provisions in a multi-unit development, will not operate effectively, even if they are legally sufficient. Unitholders may refuse or be unable to pay the service charge. The developer or landlord would normally be responsible for making up service cost shortfalls for “void” (unsold/unoccupied units). If the developer has become insolvent, it may not have sufficient resources to provide the services.
The alternative risk is that the management company may overcharge and be unaccountable for its services. The developer may retain control of the management company indefinitely, through retained voting rights or simply by owning retained units. There may be a suspicion that the managing agent has been appointed by the developer on unduly favourable terms.
The service charges can be recovered by the landlord/management company as a debt due. They may also be a basis for forfeiting the lease. Only then can a landlord forfeit the lease.
Service Charge Issues II
In some cases, the landlord and management company rights are separated. The management company can only forfeit the lease if it is the landlord.
There will generally be a list of services which the landlord or management companies, most or can provide. Often the management companies will have the discretion to stop the provision of certain services or to provide further services. Generally, the landlord or management company will have a wide discretion.
Generally, the management company will limit its legal liability in the event that services are not provided. It may be provided that there is no right to claim unless notice is given to the management company and there is a continued failure following notices. Three will usually be exemptions of liability for the management company where the failure to provide services are from factors outside its control. Everything will depend on the wording of the lease.
Sinking Fund
It is commonly provided that the manager/landlord company may provide a service against a sinking fund for capital provision for service charges for future expenditure at the end of its lifetime. This may include plant and equipment but also provision for renewal of the centre itself. This can be a matter of controversy.
The repairing obligation for the common parts will rest with the management company. The sinking fund would represent provision towards long-term expenditure. It will provide for monies in the long run. A portion of the cost of repair and management over time.
Insurance
Generally, insurance is undertaken in common as it would not be possible to insure part of the structure separate from the other.
The insurance obligations to insurance will generally be comprised in or be associated with the service charge and collected by the management company. The obligations and issues that arise in respect of insurance with a single landlord will arise in the context of the management company.
Generally, there will be a provision that the service charge may be vouched by an auditor or another person. It is usually is provided that the certificate of the service charge and amounts due are binding and final. The initial service charge and grant of a lease is often estimated. The estimate is sometimes found to be significantly less than the actual ultimate liability.
There exists no legislation in relation to commercial premises to challenge management companies. There is the legislation in respect of residential apartments in respect of which similar issues arise.