Service Charge Disputes in Commercial Leases: How Tenants Challenge Costs

How a commercial service charge works

A commercial lease typically contains:

• A schedule of services the landlord agrees to provide
• A service-charge clause requiring the tenant to pay a percentage of those costs
• Provisions for budgeting, on-account payments, year-end reconciliation, and audit

The landlord raises a service charge by:

1. Setting an annual budget
2. Demanding on-account payments quarterly or half-yearly
3. Producing year-end accounts showing actual costs
4. Issuing a balancing demand or credit

The tenant pays the on-account amounts and the year-end balancing item according to the lease's apportionment formula.

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The three grounds of challenge

Ground 1 — outside the scope of the clause

The first question is always: does the lease actually require the tenant to pay this cost?

Service-charge clauses are interpreted like any other contractual term; there is no special rule of restrictive interpretation (Arnold v Britton [2015] UKSC 36 at [23]). Costs that fall outside the clause's wording cannot be recovered, even if the landlord considers them reasonable.

Common scope challenges:

• Capital improvements vs repairs — leases distinguishing between maintenance and improvement may exclude the latter
• Specific exclusions — common exclusions for original construction defects, voids, marketing of vacant units
• Time-barred costs — costs from earlier years that were not raised in time under the lease's apportionment provisions
• Costs of disputes — landlord's legal costs of pursuing other tenants are sometimes excluded from service charge

Ground 2 — unreasonable in amount or quality

Even where a cost falls within the scope, the tenant can challenge the amount on the basis that:

• The cost is excessive compared with market rates
• The work was procured without competitive tendering
• The standard of work is higher than the lease requires
• The number of suppliers or labour hours is disproportionate

Whether costs must be reasonable depends on the lease wording: many clauses expressly require costs to be "reasonably incurred" or "incurred in a proper and economic manner"; where the lease is silent, whether such a term is implied depends on the ordinary rules for implying terms.

In practice, tenants often retain a building surveyor to benchmark costs against industry data.

Ground 3 — improperly administered

Procedural challenges are often the most fruitful. They can defeat substantively reasonable claims through procedural failure.

Common administrative challenges:

• No certified accounts — most leases require year-end accounts certified by the landlord's accountant; absence is a breach
• No audit access — many leases give the tenant a right to inspect underlying invoices; refusal undermines the demand
• Misallocation between schedules — multi-let buildings often have separate "estate" and "building" schedules; misallocation can affect the apportionment
• Apportionment errors — the lease defines the percentage; using a different percentage breaches the lease
• Late demand — some leases set time limits for raising costs; check the lease for any period after the year end

A disputed demand on procedural grounds may not eliminate the underlying liability but can delay it and force re-issue.

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The RICS professional standard

The RICS professional standard Service charges in commercial property (2nd edition, effective 31 December 2025) sets mandatory requirements for RICS members and RICS-regulated firms managing service charges (section 2).

The standard requires:

• Budgets — with an explanatory commentary, at least one month before the start of the service charge year
• Year-end accounts — approved accounts showing a true and accurate record of actual expenditure within four months of the year end
• Apportionment matrix — showing the detailed basis of calculation and the apportionment per schedule for each unit
• Management fees — fees to comprise only reasonable costs and overheads, including a reasonable profit, for the actual work of managing the service charge; fees based on a percentage of the service charge are no longer considered appropriate (§4.1.1.2).

A tenant arguing breach of the standard is on stronger ground if the lease refers to it (or to an earlier RICS service charge code) or if the standard's requirements reflect industry practice in the relevant year.

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Practical steps for a tenant disputing a service charge

Step 1 — request the supporting documents

Most leases give tenants a right of inspection. Use it. Request:

• Itemised year-end accounts
• Underlying invoices for major cost lines
• The annual budget and any revisions
• The apportionment calculation

Check the lease for any period within which the landlord must respond. A refusal is itself a procedural ground.

Step 2 — pay under protest, or withhold

Withholding payment is risky — a non-payment leaves the tenant in arrears, exposes the lease to forfeiture (subject to relief from forfeiture) and to interest under the lease.

The safer route is to pay on-account amounts, then dispute the year-end reconciliation or claim repayment on a credit basis. Some leases include "pay-now, dispute-later" provisions that require payment first; these are enforceable.

For a substantive challenge, pay under written protest, reserving rights, while the dispute is resolved.

Step 3 — write a substantive challenge letter

A good service-charge challenge letter:

• Identifies each disputed item by line
• States which of the three grounds applies
• References the specific lease clause and the alleged breach
• Quantifies the disputed amount
• Proposes a way forward (audit, mediation, expert determination)

Step 4 — escalate proportionately

Most service-charge disputes resolve through correspondence, with adjustments at year-end reconciliation. Where they do not, options are:

• Mediation — a quick, informal route, particularly where the relationship is ongoing
• Expert determination — both sides agree to an independent surveyor's view
• Arbitration — where the lease provides for it
• County Court / High Court litigation — where amounts justify the cost

The county court hearing centre is the usual forum. Claims above £100,000 may be started in the High Court (PD 7A para 2.1).

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Special features of multi-let buildings

In multi-let buildings, additional complications arise:

• Service-charge schedules — different parts of the building may have different schedules (e.g. "estate" schedule for shared services, "building" schedule for building-specific services)
• Anchor-tenant carve-outs — anchor tenants in shopping centres often have heavily-modified service-charge clauses
• Capping arrangements — some tenants have negotiated caps on annual increases
• Voids contributions — where a unit is vacant, who pays the void's share?

A tenant in a multi-let building should check:

• Which schedule applies to them
• Whether other tenants have caps or carve-outs that shift cost onto them
• Whether voids are landlord-funded or socialised across paying tenants

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Bundle preparation for a service-charge trial

A service-charge trial bundle commonly contains:

• Section A: Pleadings (Particulars of Claim, Defence, replies)
• Section B: Lease and side letters
• Section C: Service-charge demands and supporting accounts (year-by-year)
• Section D: Witness statements
• Section E: Surveyor's report (if scope of clause or reasonableness is in issue)
• Section F: Building cost benchmark data
• Section G: Inter-party correspondence
• Section H: Authorities

BundleCreator's Commercial Property template structures the bundle in the order trial counsel expect, with each year's service-charge demands and accounts grouped chronologically. Pagination, hyperlinked index, OCR, and bookmarks are produced automatically. A bundle that takes 8-15 hours to assemble manually is usually finished in around 30 minutes.

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Frequently asked questions

Can I withhold all service charge during a dispute?

Risky — and often impermissible under the lease. Many commercial leases have express words requiring payment without set-off. Even where set-off may be available, withholding risks interest and forfeiture proceedings if the set-off is not made out. Pay under protest and dispute through correspondence and accounting adjustments.

What is the time limit for challenging an old service-charge year?

Two answers. Under the lease, any period the lease sets for challenging the year-end statement or certificate (it varies from lease to lease). Under the Limitation Act 1980, six years: for service charge reserved as rent, from when the arrears became due (s.19); otherwise from accrual of the cause of action (s.5), or 12 years for a covenant in a lease by deed (s.8).

Is the landlord's management fee always recoverable?

Only if the lease allows it. Many modern leases include management fees in the recoverable cost; older leases sometimes do not. The standard requires fees to comprise only reasonable costs and overheads, including a reasonable profit, for the actual work of managing the service charge; fees based on a percentage of the service charge are no longer considered appropriate (§4.1.1.2).

What about "improvements" charged as repairs?

A classic dispute. The general rule: maintenance and repair are recoverable; improvements (works that put the building in a better condition than originally required) are not, unless the lease expressly allows.

The line is fact-sensitive and turns on the lease wording and the nature and extent of the works; borderline cases need expert evidence.

Can I sue for repayment of past overcharges?

Yes, where:

• The overcharge was paid within six years (Limitation Act 1980, section 5)
• The lease's account-finalisation provisions have not closed the year (some leases include "binding" provisions requiring objection within a window)
• You can prove the overcharge

Repayment claims for past years are common in tenant exits and lease renewals — a tenant about to sign a new lease has leverage to negotiate past corrections.

What if the landlord refuses to provide audit access?

Most leases give a right of inspection. Refusing inspection is a breach. The tenant can apply to the County Court for a specific performance order, though most disputes resolve once the threat of court action is made and the landlord realises the tenant is serious.

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Further reading

• Landlord and Tenant (Covenants) Act 1995 — covenant transfers
• RICS Service charges in commercial property — professional standard, 2nd edition
• Limitation Act 1980 — particularly section 5
• Lease Renewal Under the 1954 Act: Section 25 and Section 26 Notices
• Dilapidations Claims: Section 18 Cap and Tenant Defence Strategies