Biggart Baillie Solicitors

Service Charge v Service Value

Tuesday, February 10, 2009

by John McKie

In the current economic climate disputes over service charge accounts are on the rise as many tenants, particularly those in the retail sector, look to get best value for services.

The recent Boots UK Limited v Trafford Centre Limited case in England provides an example of a retail tenant challenging the inclusion of promotional and advertising expenses in the service charge by a shopping centre landlord and also serves as an example of why landlords and tenants need to carefully consider how far service charge provisions extend.

It is emphasised that the case was decided by the English courts applying English law and the decision does not have the weight of precedent in Scotland.

However, it is an interesting consideration of reasonably typical service charge provisions in commercial leases whether the property is situated in England or Scotland.

The Facts

The tenant had a 25-year lease of a retail unit at a shopping centre. The lease contained service charge provisions. The service charge items could include the landlord costs in providing Promotion. “Promotion” was defined in the lease as “…advertising and other forms of promotion of the shopping centre intended to bring additional custom to the shopping centre which shall be reasonable and proper…”.

The lease required the landlord to pay 50% of the cost of Promotion, with the total cost of Promotion not exceeding 10% of the total net service charge.

The landlord and tenant disagreed whether the following matters could be included within the definition of Promotion: -

• Entertainments – a number of entertainers performed regularly in the shopping centre.
  
• Decorations – Christmas decorations over the Christmas period.
  
• Christmas Grotto.
  
• Sky Wall – a large permanent television screen mounted in the shopping centre used by the landlord to give information on the shopping centre and to advertise the shopping centre’s tenants and to show music videos.

The tenant accepted that the items were service charge items but claimed that each were a Promotion to which the 50% sharing provision and 10% cap should apply.

The Dispute

The tenant argued that a matter was Promotion if its sole or dominant purpose (or a substantial part of its purpose) was to bring custom to the shopping centre. The tenant submitted that each "intended to bring additional custom to the Centre", they were a "form of promotion of the Centre", and therefore within the definition of Promotion.

The landlord argued that Promotion meant something that occurred outside the shopping centre or occurred irregularly or was a one-off or was out of the ordinary or unusual. The landlord therefore submitted that the grotto, decorations and sky wall were regular features and should not fall within the definition of Promotion.

The Decision

The High Court held that the disputed matters were each a facility, an amenity or an attraction, rather than a form of promotion of the shopping centre. The landlord could pass on the cost of entertainments, Christmas decorations, a Christmas grotto and a Sky Wall to its shopping centre tenants via the service charge.

Although finding in favour of the landlord, the High Court did reject the landlord's suggested approaches. The definition of "Promotion" did not draw a line between inside or outside, regular or irregular, usual or unusual."

The Court stated that it was necessary to distinguish between something which is a promotion of the shopping centre and something which is:

(i) of benefit to the centre,
(ii) an attraction within the Centre and (iii) a service, a facility or an amenity within the centre.

Where the Sky Wall was used by the landlord for providing information about the shopping centre, this would be a "Promotion" subject to the 10% cap and shared 50:50 with the landlord but that the other matters where each a facility, an amenity or an attraction and not a form of promotion of the shopping centre.

In his summing up the judge said: “You can distinguish promotion of the shopping centre from the benefit to a customer of an attraction service, and amenity. Entertainments are a facility or an amenity, not a promotion. The same conclusion can be reached as to Christmas decorations and the Grotto”.

Accordingly, Boots, and other tenants if they have similar leases, will have to pay through the service charge  all the costs of entertainments and attractions.  In the current financial climate, retailers will be very keen to limit their service charge liabilities but this case has not helped them in this respect.

To find out more or to seek advice please speak with your usual Biggart Baillie contact or contact John McKie, Associate, on 0131 226 5541 or e-mail jmckie@biggartbaillie.co.uk.