A landlord of a multi-let building usually recovers expenses for lighting, cleaning, repairing and maintaining the exterior, main structure and common areas – and of providing other services to all tenants – by way of a service charge.

There is usually no "profit" element in a service charge, the profit instead coming from the annual rent, although a landlord will not want to make a loss either for providing services.

A lease should be carefully written so that all relevant expenses are covered by the service charge. If there is no mention of a service charge in a lease, no service charge is payable. Service charge ambiguities are often construed against a landlord in favour of the tenant.

Overall, service charge expenses are split between the tenants of a building and each tenant pays a share to the landlord. Service charges are usually either a fixed percentage, or a fair proportion, of expenses determined by reference to floor areas. Dependent on age and condition, and what services are provided, service charges vary from building to building.

Tenants usually receive an estimate of service charge expenses for the upcoming year from the landlord. Based on the estimate, tenants pay monthly instalments during the year simultaneously with rent payments. After the year-end, actual expenses are calculated and the landlord either invoices the tenants for the difference or gives credits against the next service charge instalments.

A would-be tenant should request service charge details for at least the two previous years, and estimated charges for the present and upcoming year, before signing a lease. Additionally, the landlord should be asked to confirm that there are no outstanding service charge disputes and no known circumstances that could result in the estimate being inaccurate.

An open-ended tenant liability for replacement of capital items, or for hidden structural defects, or too broad a range of services (that can significantly increase or reduce), leads to uncertainty and can easily result in a dispute.

If a tenant disputes the service charge – or service provided, or not provided – and the landlord remains in default after a written complaint, the tenant may be entitled to withhold rent until the landlord makes good. However, leases often prohibit withholding rent. An alternative tenant remedy is to apply to court for either lease termination, or for an order permitting rent to be withheld until the landlord makes good.

Dependent on circumstances and lease wording, a tenant may also be entitled to remedy the service default itself and then either claim damages, or deduct expenses from rent (but remember that leases often prohibit withholding rent).

Service charge disputes most commonly arise due to poor communication and so it is important that landlords and tenants communicate their respective service and expense expectations, before a lease is signed and during the lease period. Should a significant variance arise from a service charge estimate, tenants should be consulted and notified as soon as possible of the reason for the variance, with details of the additional expenses to be invoiced.

When a new lease is negotiated, a landlord's ability to recover managing agent's fees and the ability to set up a reserve fund (commonly known as a sinking fund) for capital replacements are most commonly discussed. Unless a lease expressly provides that such expenses can be recovered, the landlord shall have to pay these expenses from rental income, possibly having an adverse effect on the value of the building.

Would-be tenants should expect a landlord of a building with existing tenants to resist negotiating new service charge provisions. This is because the landlord has already contracted to provide the services to the existing tenants, and won't want the inconvenience of providing different services to the new tenant.

It is important that both landlords and tenants instruct attorneys for advice so as to be aware of service charge, and other, liabilities before signing any lease.

Attorney Neil Molyneux is a member of the Property Practice Group of Appleby. A copy of this column is available on the firm's website at www.applebyglobal.com.

This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer.