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Business
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1/26/2011
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Service Charge – what it is and how it might affect you
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Pharmacists may be liable for service charges if their property is part of a larger building or development
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If you own a pharmacy that is part of a larger building or a development, the landlord might be responsible for maintaining the structure and pharmacists will have to contribute towards these costs. Jennifer Hotston, from law practice Charles Russell, considers such obligations known as service charges...
What does the pharmacist get out of it?
This situation works for the pharmacist, as the service charge provisions usually include an obligation on the landlord to keep the centre in a good standard of repair and condition. However, the extent of these obligations and who is responsible for paying for the services are questions that a pharmacist should consider when taking on a lease.
What is fair?
The Royal Institution of Chartered Surveyors has given guidance as to what they think should be included in the service charge provisions. Known as the “RICS Code”, it is voluntary. However, it is a good starting point for pharmacists when negotiating service charge provisions. The RICS Code recommends that service charge costs should be restricted to charges and associated administrative costs incurred in the operational management of the property. The services provided should be beneficial and relevant to the needs of the property, its owners, occupiers and their customers.
What services should a pharmacist expect?
As well as being responsible for maintaining the structure of the building, the service charge provisions often include a right for the landlord to carry out any services they want to at the centre, recovering the cost of doing so from the pharmacist and other tenants. These provisions can be quite wide. They may incorporate items such as promotional expenses for the centre including, for example, the provision of Christmas decorations. This may not be acceptable to a pharmacist. In addition, landlords often include service charge “sweeper clauses.” These are clauses that allow the landlord to include anything which is reasonable for the proper management of the centre. It is easy to see why the landlord would like to include such a clause - in case he has forgotten something when drafting the lease. However, this could mean a greater potential expense for the pharmacist than originally thought. In reality, landlords often refuse to delete this clause. As a compromise it can be amended in line with the RICS Code, by restricting additional services provided at the landlord’s reasonable discretion, to those that benefit the tenant and occupiers in the building. There are some costs which should be excluded from the charge altogether. These include costs relating to:
- collecting rent and taking action against another tenant
- vacant units at the centre
- repairs for defects in the construction or refurbishment of the centre
- improvements in the centre
Pharmacists should also consider asking a landlord to credit income that is generated for the centre to the service charge, such as income received from a public car park, where the costs of running the car park are included in the maintenance costs of the centre.
Who pays?
The landlord will want the tenants to pay all of the maintenance costs and other expenses of the building. However, the pharmacist and other tenants only want to be responsible for costs that they receive a direct benefit from.
How much is the service charge?
There are various ways a landlord can work out how much service charge each tenant is responsible for. The most common includes a fixed cost, a fixed percentage, based on floor area or certain weighting requirements or a fair and reasonable proportion. As far as the RICS Code is concerned, they do not specify a particular method, so long as the apportionment for each tenant is fair and reasonable and there is a rationale behind it. Pharmacists open for 100 hours should be aware that by adopting a fair and reasonable proportion, they may find themselves responsible for a higher contribution towards some services, than tenants open during normal trading hours.
Value for money
The aim of the RICS Code is to make sure that the service charge provides value for money. Pharmacists should ensure the service charge provisions require the landlord to act reasonably and with economy and efficiency. Pharmacists should also seek to include provisions in the service charge clause, allowing them to inspect invoices and other supporting documentation and to question or dispute the amount of service charge where appropriate. The best way to achieve certainty on service charge expenditure is to agree a service charge cap, perhaps with annual increases in accordance with the Retail Prices Index. The pharmacist can then be sure of the upper limit of this cost, making financial planning easier. This sense of security in knowing the highest potential charge cannot be underestimated. Recent cases, including those at the Westfield Shopping Centre in Hammersmith, have highlighted the need for tenants, including pharmacists, to consider this issue carefully. At that development, the service charge unexpectedly sky-rocketed between the time the tenants entered into their agreements for lease and the centre was opened - making service charge caps a very clever move.
The above is a general overview and we recommend that independent legal advice is sought for your specific concern. For guidance please contact Jennifer Hotston at jennifer.hotston@charlesrussell.co.uk. Jennifer is a solicitor in the healthcare real estate team at Charles Russell LLP. (pic of Jennifer Hotston)
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