It's always extremely useful for a tenant to have the benefit of an annual service charge cap in its Lease – particularly in situations where there is no established service charge history.

However in practice, caps are often very difficult to negotiate – especially if not dealt with at the Heads of Terms stage. Most landlords will resist them because it creates the potential for a service charge shortfall (which the landlord will have to absorb) and this can in turn adversely affect the investment value of the landlord's interest.

Therefore we do recommend introducing the concept of a cap at an early stage of the commercial negotiation. If resistance is encountered, then there are ways of softening its impact to make it more palatable to a landlord. For example:

  • Pitching the level of the cap at a high enough figure (above the current estimated service charge) so as to give the Landlord sufficient leeway to feel comfortable
  • Offering an annual increase in the cap, eg, by index linking it in accordance with RPI
  • Limiting the cap to the first few years of the term only
  • Making the cap personal to the original tenant
  • Putting the cap in a side letter, so that it's kept outside the public domain and therefore outside the knowledge of other tenants.

Bottom line: any type of cap is better than no cap.