Previously in this space, I discussed service charge from a tenant's perspective. Today, I deal with the other side of the coin and discuss service charge from the landlord's perspective.

Service charge is the expression used to describe a tenant's payment of a portion of common expenses. These expenses are normally the cost of lighting, cleaning, repairing and maintaining the exterior, main structure and common areas of a building that has more than one tenant.

A tenant has no obligation to pay a service charge without an express provision to that effect in the lease.

If the provisions of the lease relating to recovery of the service charge are ambiguous, those ambiguities will be construed against the landlord.

The landlord therefore needs to ensure that the service charge provisions in his lease set out clear terms for recovery.

The lease should also set out how the tenant's proportion of the charge will be calculated.

Common methods are to provide for payment of a fixed percentage of costs or a fair proportion, determined by reference to floor areas.

Most often, service charges are paid in instalments as additional rent in accordance with the landlord's estimate of costs at the beginning of the service charge year.

At the end of the year when the actual costs are known the landlord carries out a balancing exercise and calls for the tenant to make up any shortfall or provides a credit as appropriate.

Landlords must ensure that their ability to recover costs reflects their liability under the lease; for example to repair, redecorate and to insure.

This is particularly important in a condominium situation where the landlord cannot make up the shortfall by dipping into another source of income, such as rents.

Two items that often cause disputes are the ability to recover the fees of any managing agents and the ability to set up a reserve fund so that expensive items of capital replacement are provided for over time (this may be referred to as a `sinking fund').

The landlord must bear these costs unless the lease provides otherwise.

If such costs are substantial the landlord's inability to recover them may well affect his ability to sell a building or to use it as security for loans.

Most landlords would prefer to make a full recovery of all items of expenditure. However, they may put a cap on service charges to keep their tenants happy.

Whatever the proportion of the cost passed on to tenants a landlord should always do his best to manage his building in a proper and reasonable manner, or `in accordance with accepted principles of good estate management'.

Only those costs that are fairly and reasonably incurred ought properly to be recovered unless the lease provides otherwise.

The landlord's recovery will be limited to actual expenditure without any element of profit unless there is a very clear indication to the contrary in the lease.

Landlords should ensure that they can enforce the payment of the service charge by making non-payment a ground for bringing the lease to an end.

They should also ensure that the service charge is reserved as rent, which provides additional remedies for its recovery and places the landlord in a better position if the tenant becomes insolvent.

Landlords will also want to ensure that payments of both rent and service charge are to be made `without any deduction or set-off'.

The landlord should beware wording that suggests that there is a condition that must be fulfilled before any liability arises.

Possible areas for dispute are prior consultation procedures or certification from an accountant. The landlord will wish to ensure that any certificate given by the accountant is conclusive and binding.

Alternatively he may provide for dispute resolution by way of expert determination or arbitration which is likely to be quicker and less expensive than court action.

Service charge recovery is a potential minefield. Landlords can avoid problems by thinking carefully about their long term plans for a building and having an attorney who specialises in the commercial property field draw up a bespoke lease that is appropriate to their building and plans for it.

Litigation can be a very expensive and uncertain process when a tenant refuses to pay. Landlords who consider their tenants' interests and act in a fair manner tend to have fewer problems whatever the lease says.

Attorney Michelle Stone is a member of the Property Department at Appleby Spurling & Kempe. You can write to her with your questions at mstone yask.bm.

Copies of Mrs. Stone's columns can be obtained on the Appleby Spurling & Kempe web site at www.ask.bm.

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.