Fairer shares for all

Published:  26 February, 2014

T’was the season to be jolly but who pays to deck the halls and entertain the children, asks Rebecca Ellis

Landlords and managers of shopping centres often provide entertainment and other amenities to encourage increased numbers of visitors staying longer. However, in the current economic climate, tenants are paying greater attention to service charge provisions with a view to reducing costs. 

Unless the lease clearly sets out how such costs are to be treated under the service charge, tenants are keenly challenging service charge costs and landlords may find themselves unable to recover these costs from their tenants.

Will you be able to recover promotion costs through the service charge? Obviously every case is different, and there is no substitute for individual legal advice. But in general, the answer will depend on the wording of the service charge clause in each lease. 

However, Boots UK Limited v Trafford Centre Limited [2008] is a landlord friendly case which provided useful guidance on how to distinguish between acts which constitute promotion of the centre (the costs of which should be shared between the landlord and tenant under the terms of the lease) and acts which were a benefit to the centre (and should be fully recoverable by the landlord from the tenant through the service charge).

Contrary to the parties’ arguments, the court held that a promotion could equally take place inside as well as outside the centre and it made no difference whether the activity was regular or irregular, usual or unusual. Instead, the correct approach is to ask firstly: is the matter a form of promotion? And if so, is the form of promotion intended to bring additional custom to the centre?

So what constitutes a promotion?

Applying these tests, the following items were not ‘a form of promotion’ of the centre and were instead a facility, amenity or attraction for the centre. As a result, there was no 50:50 sharing of the costs of these facilities and the 10 per cent cap in the lease did not apply in the tenants’ favour. The landlord could, therefore, recover the costs fully through the service charge for the following acts which were a benefit to the centre:

Christmas decorations (even substantial and high quality ones);

Entertainment such as jazz bands and children’s entertainers; 

Santa’s grotto; and

A large television screen providing information about the centre and used for playing music videos as entertainment

However, any costs incurred in using the large television screen to advertise the centre did fall under the definition of a promotion cost for which the landlord was required to pay 50 per cent.

And what about income generated from promotional entertainment?

It was a factor in the Trafford Centre case that all income generated by the promotional entertainments was applied to reduce the service charge. As yet untested in court is the situation where the landlord keeps income generated from space in the common parts. It is generally anticipated that a court would not view that as fair and would expect the space to be included in the service charge or the income treated as a service charge credit. 

Landlords generally want to avoid this and so ensuring the lease is drafted carefully to cover such income is key to avoiding a situation which requires the court to decide what would be fair and reasonable.

Anyone about to enter into a new lease should ensure that service charge clauses are drafted carefully so as to spell out the extent of both parties’ liabilities.

Landlords, on-site management teams and their agents and advisors need to draw their attention to these issues and early consultation with tenants and legal advisors on what will be reclaimed may reduce the risk of a costly dispute arising.

Collaboration between landlords and tenants is very fashionable at the moment and sharing the burden of the promotion costs is encouraged by the RICS service charge code and the court as being the fairest way of dealing with promotion costs.

Rebecca Ellis is an associate at Stevens & Bolton LLP

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