The service charge on a second site: what to cap before you sign

It arrives quarterly, it gets paid, and on one site nobody notices. On two it compounds, because the same drafting sits in both leases and neither was read at the point it could still have been changed.

Problems, in order · Part of Outsourced General Counsel

A second site changes the arithmetic of a lease in a way the first one does not. On one site the service charge is an irritant: a number arrives, it gets paid, it is forgotten. On two sites it becomes a cost line that compounds, because the same drafting usually sits in both leases and neither was read closely at the point it could still have been changed.

The clause that decides how much this costs you over a decade is rarely the rent clause. It is the service charge clause, and specifically whether it contains three things: a ceiling, a right to see the arithmetic, and a list of what the landlord may not put through it.

What is a service charge cap in a commercial lease?

That last sentence is the whole point, and it is the part tenants consistently underestimate. An uncapped service charge is not a budget. It is an open commitment to fund someone else's spending decisions on a building you do not own and cannot control.

Caps come in three broad shapes, and they are not equivalent.

A fixed cap states a money figure. It is the strongest form and the hardest to get, and where a landlord agrees to one they usually take something back elsewhere: a longer term, a shorter rent-free, a tighter break condition.

An indexed cap allows the charge to rise with a published index. This is the most common compromise and it is a reasonable one, provided the index is named, the base year is stated, and there is no side door allowing the landlord to escape it.

A percentage collar limits year-on-year increases, often to five or ten per cent. It reads as protection and frequently is not, because a ten per cent compounding increase doubles the charge inside eight years.

The second distinction matters as much as the first: a cap on the total service charge is worth considerably more than a cap on individual heads of expenditure. Cap the heads and the landlord can still add new ones.

What can a landlord actually recover?

Two categories cause most of the argument.

The first is improvement versus repair. A landlord may replace a failing plant item with a better one and put the whole cost through the charge. Well-drafted leases say that where the works go beyond repair, the tenant contributes only the cost of repair. Most leases do not say that.

The second is the sinking or reserve fund. A fund is not automatically unreasonable, but it should be held separately, it should earn interest for the contributors, and it should be returned or credited where the building is sold or the lease ends. If your lease is silent on all three, you are lending money interest-free for works you may never benefit from.

The reconciliation right, and why it is worth more than it sounds

You will pay on account against a budget, usually quarterly. The number that matters is the one at the year end, when actual expenditure is certified and the difference is either billed or credited.

A lease that gives you a right to that certificate on a stated timescale, with a right to inspect the underlying invoices, is a meaningfully different lease from one that does not. Without it, the reconciliation happens when the landlord's agent gets round to it, and in practice that often means it does not happen at all.

There is a professional floor underneath this even where your lease is thin. The RICS professional standard on service charges in commercial property is now in its second edition and takes effect from 31 December 2025. It sets mandatory requirements for RICS members and RICS-regulated firms covering annual budgets with explanatory commentary, certified year-end accounts, and an apportionment matrix issued to tenants.

That is a lever. If the managing agent is RICS-regulated, the standard applies to them whatever your lease says, and asking for the apportionment matrix in writing is a short email with a professional obligation behind it.

Why the second site is where it bites

Three things change at once.

The drafting replicates. Whatever you accepted the first time is usually what the agent puts in front of you the second time, because it is the version that has already been agreed.

The apportionments diverge. One lease may fix your share at a stated percentage; the other may say "a fair and reasonable proportion as determined by the landlord's surveyor". The second formulation is not a percentage. It is a discretion, and your share can move without your agreement as other units let or fall vacant.

Nobody owns the review. On one site the operator notices the charge. On two, the charge arrives at a finance function that pays it because it looks like a bill.

This is the point at which the job stops being a property question and becomes an administrative one. Somebody has to hold both leases, know both year ends, know which certificate is overdue, and act rather than file. That is the ordinary work of an outsourced General Counsel function: not clever drafting, but a register, a date, and a named person whose job it is to ask.

What to do when the lease is already signed

Signed is not finished.

Ask for the year-end certificate and the apportionment matrix, in writing, for every site. Where the managing agent is RICS-regulated, both are within their professional requirements.

Reconcile the last three years. In estates that have never been checked, the recurring findings are dull and worth money: charges apportioned on floor areas that changed, management fees calculated on a percentage of a total that includes the management fee, insurance commissions, and works that were improvements recovered as repairs.

Read the sweeper clause before you concede anything. A general words provision does not entitle the landlord to recover a category the specific list deliberately left out.

Fix the next one. The best time to negotiate a cap is when the landlord wants the letting, which is the week before you sign, not the year after.

If the lease itself is coming to an end rather than running, the timing questions are different and largely statutory; when the lease runs out, renewal is controlled by whoever serves the right notice first. And the charge that lands at the end of a term is a separate animal again, covered in the dilapidations schedule and what you actually owe.

For multi-site operators in hospitality and leisure, where property cost sits behind only payroll, the service charge across an estate is usually the largest cost nobody has audited.

Where a specialist is needed

Some of this sits outside a commercial function and is properly instructed out.

A disputed rateable value goes to a rating surveyor. A contested service charge that reaches litigation, and any proceedings under Part II of the Landlord and Tenant Act 1954, are conducted by instructed specialists. The VAT treatment of service charge and any capital allowances on plant are matters for your accountants.

Dinmore Bell holds the commercial ground in between: reading the leases as a set, running the reconciliation, corresponding with the landlord and the managing agent, and instructing and coordinating the specialists where the question becomes one of theirs.