Assignment, subletting and service charge disputes with commercial leases

Sweet & Maxwell’s latest report on the real estate sector shows that the recession has a significant impact on the amount of commercial property disputes in the High Court.

A sharp rise in the number of legal disputes (claims worth more than £25,000.00) between landlords and tenants is clearly evident with a rise of 43% between 2008 and 2009. The most contentious issues involve subletting, service charges, and dilapidations.

Subletting has become quite common among businesses leaseholders who often try to make money out of any excess space that they have due to i.e. redundancies. The disputes usually arise landlords refuse to grant permission to sublet. Most landlords are concerned that desperate sub-letting at lower than the market rates may have detrimental impact on future rent reviews and overall return on investment from the property. With property rent charges being the second largest business overhead, after personnel costs, thousands of legal disputes businesses are also more likely to dispute service charges.

Alienation: Commercial Subletting and Assigning

Alienation is a legal term that entails the processes of lease assignment (our main site has more detail on this), subletting and parting with possession or occupation. The legal rights and obligations relating to alienation are usually contained in the commercial lease contract and these may also involve issues arising under the Landlord and Tenant legislation.

While subletting the original tenant remains fully responsible for the entire property and rent. Part or all of these obligations are then passed onto the subtenant in a sub-lease. Commercial lease documents often contain a number of clauses stipulating whether subletting is acceptable and if so what are the right procedures and conditions that need to be followed and satisfied and these will invariably create some delay and additional cost, since the landlord will definitely require his/her/it’s legal and other fees to be paid in relation to consideration of the issue and any appropriate formal licence document that may be required. Quite often commercial leases will contain a provision completely prohibiting subleasing of certain parts of the commercial property.

To start subletting, the tenant will quite likely be contractually required to apply to the landlord for consent, usually in the form of a formal licence,  to assign or sublet the property or a part thereof. The lease document will determine the correct procedure both for application and the landlord’s reply including its rights to objections. In addition some terms will be implied by law. The Landlord and Tenant Act 1927 states that the landlord has to act reasonably.

Where a tenant is in breach of the correct procedure they risk being sued by the landlord for damages, legal costs and even may be forced to forfeit the lease. By the same token, if a landlord acts unreasonably and withholds consent for assignment or subletting without reasonable grounds it risks an action for damages and legal costs from the tenant.

Service Charge Clauses

Service charge clauses are an important part of any lease. Due to the bad economic climate it is quite common for tenants to be more cost aware. Many tenants are much more concerned now about the financial commitments in a lease and will carefully scrutinise all expenditure. A service charge is a way for a landlord to recover the costs of maintenance, repair and other services from a tenant.

Typical costs include:

  • Repairs which relate to significant structural repairs
  • Costs and services charged for regular maintenance such as cleaning, rubbish collection, lighting, heating, air-conditioning, and security
  • Charges for provision of staff for a building
  • Amounts charged as fee for property management
  • Reserve fund charges
  • Insurance costs

Naturally, there is some conflict of interest between landlord and tenants. Tenants will want any work that they are responsible for done as cheap as possible. On the other hand landlords will expect and aim to get the best quality work to ensure that the property is kept in good shape and grows in value.

Disputes over service charge clauses are normally very technical in nature and the outcome is typically based on exact analysis of a particular commercial lease service charge clause and often some auditing of accounts if the tenants suspect overcharging. It is crucial that you obtain advice from a commercial solicitor before taking any steps and if you are a tenant in a large building such as an office block, much is likely to depend on whether other leaseholders share your view that the landlord is not acting correctly, so it’s worth making enquiries – you will be in a much stronger position both tactically and probably legally if you can garner support from other occupiers. It may also be prudent to consider alternative dispute resolution to avoid costly litigation.

Get in touch with us relating to any kind of service charge dispute or problem, we can help, whether you are the landlord or the tenant.

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