What are commercial service charges, and how do they work?

Getting a commercial lease for your business is a huge milestone in your journey, but it doesn’t come without complications.

A high rent price is one thing, but it isn’t the only thing you’ll be paying to your landlord. 

Instead, commercial properties often come with service charges — an additional fee that covers cleaning, repairs, building insurance, and other shared services for the property.

Service charges can really add up, and if you’re not clear on how they work, you could end up paying more than you should.

In this article, we’ll explain what commercial service charges are, including how they’re calculated, how they’re managed, and how they’re regulated. We’ll also go through the rights you’re entitled to, so that you can protect your business from any unfair charges.

What is a commercial service charge?

A commercial service charge is a fee that landlords charge to cover the costs of maintaining and repairing a property. 

There are several ways that these charges are calculated. The most common calculation methods include:

• Proportional: a business pays a percentage based on the size of the unit compared to the total rentable space

Example: if a unit is 2,000 sq ft and the total space is 20,000 square ft, the tenant pays 10% of the total service charge costs.

• Variable: based on the actual costs paid by the landlord during the year. The tenant is expected to pay their share accordingly.

Example: the service charge is estimated at £4,000 at the start of the year, which the tenant pays in advance (often quarterly). At the year-end, the landlord calculates the actual costs, which come to £4,500. The tenant would then pay the extra £500 as a balancing charge. If the cost ends up lower, however, then the tenant would receive a refund of the remaining amount.

• Fixed: the service charge is charged at a set amount every year, regardless of the actual costs.

Example: the service charge is at a fixed rate of £5,000 annually. Even if the landlord spends more (or less) on services, the tenant still pays the same amount. This method can be useful for predictable budgeting, but it also risks overpaying if actual costs are lower.

What does a commercial service charge cover?

The typical areas that a commercial service charge covers include:

• Cleaning and repairs for common areas
• Staff (e.g. receptionists or security personnel)
• Heating/lighting (shared spaces)
• Repairs and maintenance
• Building insurance
• Fire safety equipment

Are service charges legally required?

Service charges aren’t automatically required by law, and a tenant only has to pay them if it is explicitly stated on the lease agreement. In other words, they’re a contractual obligation, not a legal one by default.

That being said, even when service charges are included in the lease, they must:

• Be reasonable, and tenants have the right to dispute excessive or unfair charges
• Match the lease description, meaning landlords can’t charge for things not specified
• Provide a breakdown or budget, especially in multi-tenant buildings

How are commercial service charges managed?

Commercial charges are typically managed through the lease agreement between the landlord and the tenant. The lease must outline how the charges are calculated, what services are covered, and how the costs are allocated. Here’s a quick breakdown of how it works:

• The landlord (or managing agent) will create a budget forecast for the upcoming year, including estimated costs (e.g. cleaning, security, maintenance, insurance, etc.).
• Tenants are billed based on the estimated budget, either in quarterly or monthly instalments, or one full annual payment.
• Throughout the year, the landlord pays for the fees included and records the actual cost of services and expenses.
• After the service charge year ends, the landlord totals the real costs paid and compares them with the amount collected from tenants.
• A service charge reconciliation statement is shared with tenants, which usually includes budgeted vs actual costs, a breakdown of expenses (by category), each tenant’s contribution, and any overpayments or shortfalls.

Can service charges be increased at any time?

The short answer is no. Commercial service charges cannot just be increased at any time. While service charges can increase based on actual costs, they can only be enforced if they’re reasonable and follow the lease agreement.

However, landlords do have some flexibility when it comes to service charges, particularly when there’s a cost increase (e.g. utility bills, maintenance costs, or insurance premiums), new services are introduced (e.g. additional security, cleaning or refurbishments), or the lease allows for inflation-linked increases, such as Retail Price Index (RPI) and the Consumer Price Index (CPI).

So, increased service charges aren’t off the table completely, but as a tenant, you’ll need to check:

• What’s covered by the service charge (make sure it’s clearly defined)
• Whether charges are capped or uncapped
• Whether increases are tied to RPI/CPI
• Whether the landlord can charge for major improvements
• How disputes are handled under the lease

Who regulates commercial service charges?

Commercial service charges in the UK are primarily regulated by the Royal Institution of Chartered Surveyors (RICS). However, they are not a legal requirement, and the RICS Code of Practice is not legally binding.

Still, RICS provides the best practices for managing and administering commercial service charges, and UK courts often refer to them when resolving service charge disputes. The code of practice covers things such as transparency in charges, how costs should be allocated, and how landlords should communicate with tenants.

What rights do businesses have when it comes to service charges?

Commercial tenants have a number of rights when it comes to service charges. Most of them come from the lease agreement itself, but can also be backed by common law principles and the RICS Code of Practice.

The key rights that businesses have include:

• Right to be charged fairly: You only have to pay for the costs listed or allowed on your lease. If it’s not on the lease, the landlord can’t charge you for it.
• Right to a fair and reasonable amount: Charges must be reasonable, properly apportioned, and reflect the actual cost of services.
• Right to see the breakdown of costs: You can request a budget forecast (at the start of the year), a reconciliation statement, or supporting documents (e.g. invoices, receipts, and maintenance contracts).
• Right to dispute charges: You can raise a formal dispute if you believe your landlord has overcharged you, charged for services not provided, miscalculated your share, or added any unjustified costs.
• Right to transparency in calculation: You should be told how your share of the service charge is calculated (e.g. by floor area, fixed cost, etc.).

But while you are entitled to these rights, it’s also important that you review your commercial lease agreement before signing. That way, you’ll have a clear understanding of what’s included in your service charge, how it’s calculated, and when you’ll be charged. 

You should also seek legal advice before agreeing to anything, as this will help you understand the complex terms and any risks involved, so you don’t get hit with any unexpected costs later on.

How do I challenge a commercial service charge?

You have the right to dispute service charges if you believe that you’ve been charged unfairly or unlawfully. Here’s what you should do, step-by-step:

1. Review your lease first

Before jumping into anything, double-check your commercial lease to ensure you’re not missing anything. Check what it says about the services the landlord can charge for, how they’re calculated, and whether there are any caps, exclusions, or specific processes for challenging charges.

2. Ask for a breakdown

Remember, you’re entitled to ask for a breakdown of your service charge costs. You should ask for a detailed statement or reconciliation, an invoice/receipt of the cost, and an explanation of how your share was requested.

3. Check for common issues

Once your landlord provides you with the cost breakdown, you should look out for things like:

• Charges for services you don’t benefit from
• Costs for things the landlord didn’t actually spend money on
• Charges that aren’t reasonable, or go beyond what’s agreed on the lease

4. Raise a formal objection

If you find that something isn’t right, contact your landlord or managing agent, explaining what you’re disputing and why. Remember to reference your lease, the RICs Cost of Practice (if helpful), and any supporting evidence.

Can you avoid commercial service charges altogether?

Unfortunately, it’s generally not possible to completely avoid commercial service charges, as they’re a standard part of most commercial leases.

However, if you find that getting a commercial lease or renting an office space is out of your budget right now, a good alternative is coworking.

Coworking is a flexible style of working where individuals (e.g. sole traders or freelancers) and businesses share a common workspace, rather than working in private offices or from home.

The cost of coworking is much cheaper than taking out a commercial lease, as you only have to pay a monthly fee, which covers several amenities, including desk space, WiFi, kitchen areas, and quiet zones.

In the UK, there are over 6,000 coworking locations, according to a report by Eto & Flow. These include major cities like London, Birmingham, and Manchester.

Is coworking better value for businesses?

Flexible coworking is becoming a popular alternative for many, as 59% of businesses plan to expand their office space through coworking in the next two years.

And it’s easy to see why. Not only are coworking spaces cheaper financially, but they also don’t require any long-term commitments, making them ideal for growing teams, startups, or businesses needing short-term flexibility without the hassle of a traditional lease.

Regular leases typically involve long-term contracts (e.g. 3-10 years), and you can’t do much to adjust or change them. And if you find that the property you’re renting isn’t working out, it can be extremely difficult to get out of it, unless your landlord agrees to an early termination.

Additionally, there aren’t usually mandatory service charges involved with coworking spaces, as the only extra charges will be for added-on amenities like printers/scanners, meeting rooms, or parking. Other than that, the price you pay, whether that’s daily, weekly, or monthly, will remain the same.

Here’s a quick summary of the key differences between a coworking space and a traditional lease.

Final tips for managing service charges for a small business

Managing commercial service charges can be overwhelming, but you can stay on top of them by staying informed and being proactive.

Make sure to read your lease carefully before signing anything, so you know exactly what’s included and how charges are calculated. Don’t be afraid to negotiate either, and make sure to ask for a detailed breakdown every year to keep an eye out for any overcharges, vague costs, or any expenses that weren’t incurred.

Most importantly, remember your rights. You’re entitled to fair charges, transparency, and the ability to challenge anything that doesn’t look right. Keep records of everything and get legal advice if you’re unsure — even a quick chat with a solicitor can help you long-term.

All in all, it’s about keeping yourself informed, asking the right questions, and making the best choices for your business.