In the prevailing economic conditions tenants will review and consider the terms of their leases more closely than perhaps was the case previously, trying to find ways to reduce liabilities attaching to their occupation of their properties. Nadeem Khan and Melissa Moyle explain the implications of a recent High Court decision dealing with service charge. They also look at how tenants in administration can benefit from the exclusion to pay business rates.

Service charge

In the recent case of Boots UK Limited v Trafford Centre Limited the High Court held that the landlord could pass on the cost of entertainments, Christmas decorations, a Christmas grotto and a large permanent television screen to its shopping centre tenants via the service charge. The court held that all these items were each a facility, an amenity or an attraction, rather than a form of promotion of the shopping centre and therefore the entire cost was to be included in the ordinary service charge with no contribution from the landlord. In contrast, had these items been classified as a promotion, then the cost of providing them would have had to be shared between the landlord and the tenant.

Although the RICS Service Charge Code recognises that promotional costs should be shared, the Code is voluntary and does not override the express provisions of a lease already in place on 1 April 2007. A landlord’s primary aim is to achieve a clear rent by recovering all of its running costs from the tenants via the service charge. Landlords and tenants need to consider carefully how far a “sharing promotion costs” provision extends. If the parties intend to share the cost of facilities, amenities or attractions, the lease should provide for this explicitly.

Empty property rates

On 1 April 2008 new regulations came into force (The Non-Domestic Rating (Unoccupied Property) (England) Regulations 2008) which extend the exclusion from the obligation to pay non-domestic rates in respect of unoccupied premises to companies in administration or subject to an administration order. In addition to premises which are vacant, premises that are only used for the storage of plant, machinery or equipment used when the premises were last in use are also treated as unoccupied for the purpose of the regulations.

The exemption to pay rates lasts for three months for offices and retail properties and six months for industrial warehouse premises. Consequently when a landlord regains possession of premises where the tenant has been in administration, the landlord’s entitlement to the rate-free period will depend on whether the tenant already had the benefit of the exemption while in administration. Where the premises have already been empty for the allowance period there will be no further exemption from empty rates and full rates will be payable. If the premises have been empty for less than the allowance period, an exemption can be claimed by the landlord for the balance.

Some charging authorities may grant a further period of exemption upon request, generally, because they have been unaware of the void period during the administration. However, landlords should note that this is not a correct application of the legislation and could be challenged.