A business tenant successfully exercised a break clause and terminated its lease in March 2010. The tenant had made quarterly payments in advance on account of service charges, based on estimated expenditure in future years, as required by the lease. These included charges of £795k, collected and built up over three years from 2006 to 2009, for proposed major building works. The service charge year ran from 1 January to 31 December.
The major works were not carried out until after termination of the tenant's lease, and the total costs were over £1m. There were two disputes: the first concerned how much the landlord could charge for services for the year during which the break was effective, and the second concerned whether the landlord should repay the £795k already paid, because none of the works took place (or were paid for) until after the lease had terminated.
As to the first dispute, the court said that the service charge imposed by the landlord for the year in which the break took place (2010) could cover the complete year to 31 December 2010, and not just that part of the year before the break took effect in March.
However, it also ruled that only costs actually incurred in 2010 could be included. As some of the payments to the contractors for the major works had been made in 2011 these could not be included in the outgoing tenant's service charges for 2010. Nor could the landlord include service charges for remaining major expenditure planned for 2011.
As to the second dispute concerned the £795k, the court ruled that under the terms of the lease, this had to be repaid as none of the works it was collected for had been carried out until after the lease had ended.
The court set off the amount to be paid for 2010 against the £875,000 to be repaid, creating an excess. The court therefore awarded the tenant a percentage of that excess, pro rata its period of occupation of the premises during the 2010 service charge period before termination under the break clause.
- Landlords should ensure there is express provision in their leases as to whether or not they are entitled to keep service charges paid in anticipation of future expenditure, or risk having to repay such charges if the anticipated expenditure has not yet been incurred.
- Where there are multiple tenants, landlords should take timing of break clauses into account when planning major works (and payment for those works) to maximise the amounts they can recover in service charges.
Case ref: Friends Life Management Services Ltd v A & A Express Building Ltd  EWHC 1463