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    CITY OF LONDON LAW SOCIETY LAND LAW COMMITTEE SUGGESTED SERVICE

    CHARGE PROVISIONS FOR A SHOPPING CENTRE

INTRODUCTORY NOTES

    The following service charge provisions produced by the City of London Law Society Land Law committee ("Committee") have been drafted for a lease of a shopping centre, although they may readily be adapted for any lease of commercial premises. The Committee has also produced a separate set of service charge provisions for an office building, which can be found on the web page for the Committee and a link to which follows:

    http://www.citysolicitors.org.uk/Default.aspx?sID=923&lID=0

    While the following provisions are detailed, users should not feel constrained to use the entire set of provisions. Users may choose to incorporate part of these provisions to supplement their own lease provisions (ensuring consistency between the provisions). The draftsmen have been keen to achieve a balanced draft inspired by and reflecting many elements of the RICS Code of Practice on Service Charges in Commercial Property ("the Code"), a link to which follows:

    http://www.servicechargecode.co.uk/

    For example, many of the tenant's protection provisions reflect the Code. The RICS Code of Practice on Service Charges in Commercial Property is referred to as the "Service Charge Code" in the footnotes in this document.

    The draft envisages that the service charge provisions will be contained in a schedule to the lease. That being the case, there will need to be an obligation on the Landlord and Tenant in the main body of the lease to observe and perform their respective obligations and the conditions in the schedules to the lease.

    The service charge provisions include a number of definitions, some of which may need to be included in the main definitions clause in the lease if used elsewhere in the lease. Ensure the capitalised terms in the provisions are consistent with the other capitalised terms/definitions in the lease.

    Instructions will need to be taken on the specific services to be provided- for example, is there a car park, to which the service charge provisions will extend? There may also be a need to include an "estate charge" (covering the provision of services on the estate) as well as the service charge for the building or centre itself. Consideration should also be given to the length of the term of the lease to be granted, as it may be appropriate in the case of a short term to limit the tenant's obligations, whether through the exclusion of particular heads of expenditure or by agreeing an overall cap on the tenant's contribution.

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    Despite the lack of industry consensus on how to deal with the CRC Energy Efficiency Scheme in leases, the Committee has decided to include some drafting, if nothing else to encourage debate on the issue. The provisions include the costs of CRC allowances and administration as a non-mandatory head of charge in Part C. The Committee appreciates that it is likely the property industry's approach to lease drafting for CRC will develop and, if that happens, the Committee may revisit its approach to CRC.

    The Code uses the expression "hard" and "soft" to describe certain services. "Hard" services include mechanical and electrical services, lifts and escalators, suspended access equipment (that is, equipment used to provide access to the exterior of structures for activities such as painting and cleaning) and fabric repairs and maintenance (including repair of structure and common parts and redecorations). "Soft" services include security, cleaning and environmental (including refuse collections and landscaping) and marketing and promotions. While this draft does not refer to services as "hard" or "soft" (instead preferring more specific headings), users of these provisions should feel free to use those expressions and may also consider utilising in the lease drafting the "standard industry cost classifications". Please see Section 3, Appendix 1 of the Code for further information on the cost classifications.

    While the provisions include detailed treatment of sinking and/or reserve funds (paragraph 11), consideration should also be given to including a depreciation charge as an alternative, further details of which can be found in Section 7 of the Code. The Code encourages alternative dispute resolution ("ADR") as a means of resolving service charge disputes. While these provisions provide for determination by an independent expert (see paragraph 4.5.2), the parties should consider including an agreement by the landlord and the tenant to attempt to settle the dispute by mediation. The following links to the RICS's dispute resolution toolkit providing some useful background information:

    http://www.rics.org/drtoolkit

    We are interested in any comments you may have on the provisions and please do email the City of London Law Society at mail@citysolicitors.org.uk to provide your feedback.

    April 2011

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    SCHEDULE

    PART A

    1SERVICE CHARGE PROVISIONS

    1. DEFINITIONS

     In this Schedule, the following words and expressions shall have the following meanings:

    "Base Rate Interest" the annual interest rate equal to the base rate of [ ] Bank plc (or,

    if that rate ceases to be published, such other comparable rate of interest as the Landlord

    shall reasonably specify);

    [“Car Park” that/those part(s) of the Centre shown edged in [ ] on the plan(s)

    2numbered [ ] attached to this Lease including any ramps;]

    "Centre" the land and all buildings, fixtures and other structures from time to time on the

    land and all appurtenances of the land, which land is known as [ ] shown

    edged [ ] on the plan numbered [ ] annexed to this Lease and any extensions,

    alterations or additions from time to time made to it (but excluding all tenants' and trade

    fixtures) and any references in this Schedule to Centre include, where the context allows,

    each and every part of it;

    "Centre Opening Hours" the period commencing one hour before and ending one hour

    after the Permitted Hours;

    "Common Media" all Conducting Media within or serving the Centre, save those which

    serve individual Lettable Areas exclusively;

    "Common Parts" all parts of the Centre which are available or provided by the Landlord

    for the general use or enjoyment in common by the Landlord and the tenants or occupiers

    of or visitors to the Centre (including forecourts, pathways, accessways, entrances,

    corridors, malls, lobbies, stairways, lifts, escalators, passages, turntables, courtyards,

    3atria, light wells, pavement lights, external paviours, [[ the Car Park]], service areas,

    toilets, bin stores or other refuse facilities and fire escapes);

    "Conducting Media" pipes, wires, cables, sewers, drains, watercourses, trunking, ducts,

    flues, gutters, gullies, channels, conduits and other media;

    1 Ensure the reddendum includes an obligation on the tenant to pay the service charge in accordance with this schedule. 2 The treatment of car parks used by shoppers will need to be considered. Consider whether the Car Park is a Common Part or a Lettable Area or special case. A decision will need to be made as to whether the income from the car park will be credited to the service charge account or retained for the landlord’s benefit. The Service Charge Code calls for transparency. If the Landlord is to retain the income, this draft provides for the costs of the maintenance, repair and management of the car park to be excluded from Landlord’s Costs (see definition of Excluded Costs). If income is to be set off against Landlord’s Costs, the tenants will share the costs of servicing the car park as part of Landlord’s Costs. There may be special circumstances that call for a partial credit of car park income that will need alternative drafting. 3 See footnote 2 and paragraph 8.4.4.

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“Due Proportion” has the meaning given to it in paragraph 2.3;

    [“Excluded Costs” the costs incurred by the Landlord in the maintenance, repair and

    4management of the [Car Park]]

    "Group Company" any company which is for the time being a member of the same group of companies as the Landlord and "group of companies" has the meaning in section 42(1) of the Landlord and Tenant Act 1954;

    "Insured Risks" (subject to such exclusions and limitations as may be imposed from time to time by the insurer) fire, lightning, explosion, aircraft and articles dropped from them, riot, civil commotion, malicious damage, storm, tempest, flood, earthquake, bursting or overflowing of water tanks, apparatus and pipes, impact by any vehicle and such other risks as the Landlord may reasonably consider necessary to insure; "Landlord's Costs" the costs and expenses incurred by the Landlord of and incidental to the provision of the Services in or with respect to the Service Charge Period or attributed to it in accordance with this Schedule [but Landlord's Costs do not include the Excluded

    Costs];

    "Landlord's Surveyor" a surveyor or chartered member of a firm of surveyors who shall be a member of the Royal Institution of Chartered Surveyors or other suitably experienced person and such person may be a person employed by the Landlord or a company which is a Group Company;

    "Lettable Areas" the areas in the Centre from time to time let or designed and intended

    5for letting by the Landlord to one or more tenants;

    "Management Premises" all administrative, security and control offices and centres and stores (if any) made available by the Landlord for the purpose of managing the Centre and providing the Services, together with any accommodation provided by the Landlord or made available at the Landlord's expense for a building or facilities manager or any other person employed by it for purposes connected with the Centre;

    "Net Internal Area" net internal floor area measured in accordance with the current edition of the RICS Code of Measuring Practice;

    "Outgoings" all monetary obligations of any kind (whether parliamentary, parochial or otherwise) which are now or may at any time be assessed charged or imposed on property or on the owner or occupier of property;

    "Permitted Hours" the hours of [ ] to [ ] on every day and until [ ] on [late night shopping] except for Sundays and Bank Holidays, provided that any Sunday or Bank

    4 See footnote 2. Thought needs to be given as to the precise extent of this exclusion (precisely which costs relating to the Car Park are to be excluded). If there are any other areas in respect of which certain service costs are not to form part of Landlord’s Costs, this definition should be amended appropriately.

    5 Consider whether substations, transformer chambers etc are to be expressly excluded from Lettable Areas.

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    Holiday may be included or such hours may be reasonably varied by notice in writing

    from the Landlord to the Tenant;

    "Premises" the premises (forming part of the Centre) described in Schedule [ ] and each

    6and every part of them;

    "Retained Parts" all parts of the Centre other than the Lettable Areas

    "Service Charge" has the meaning given to it in paragraph 2.2;

    "Service Charge Code" the RICS Code of Practice 2011 - Service Charges in

    7Commercial Property, as amended from time to time;

    "Service Charge Period" the period of 12 months from [___________] to [___________]

    in each year (or such other period of 12 months or more or less than 12 months as the

    Landlord may reasonably determine);

    "Service Charge Statement" the statement referred to in paragraph 4.1;

    "Services" the services and heads of charge itemised in Parts B and C of this Schedule.

    2. TENANT'S LIABILITY TO PAY SERVICE CHARGE

    2.1 The Tenant shall pay to the Landlord the Service Charge.

    2.2 The Service Charge is a Due Proportion of the Landlord's Costs for a Service Charge

    Period attributable to the Premises in accordance with paragraph 2.3. 2.3 "Due Proportion", in relation to a unit of accommodation forming part of the Lettable

    Areas (including the Premises), is such proportion of the Landlord’s Costs as the

    Landlord reasonably deems fair and attributable to that unit of accommodation, but

    without affecting the general operation of the Landlord's discretion: 2.3.1 the proportion shall be calculated primarily on a comparison for the time being of the Net

    8Internal Area of the relevant part of the Lettable Areas with the aggregate Net Internal

    9Area of all the Lettable Areas; but

    2.3.2 [the proportion shall be adjusted in accordance with the weighting principles (referred to

    10in this Schedule as the "weighting principles") set out in Part D of this Schedule; and]

6 "Premises" will be defined elsewhere in the lease and so will not need to be defined in the service charge provisions. A definition is incorporated here for ease of reference.

    7 The following links to the Service Charge Code http://www.servicechargecode.co.uk/

    8 "Net internal area" is used in relation to offices and shops; "gross internal area" and "gross external area" both apply to industrial and warehouses (including ancillary offices). The RICS Code of Measuring Practice, currently in its 6th edition, contains detailed definitions of those terms.

    9 Floor area is probably the most common basis of service charge apportionment between tenants, but other bases may be used (see section 1.5 of the Service Charge Code for further information).

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    2.3.3 if the Landlord properly considers that such comparison is inappropriate having regard to

    the nature of the expenditure (or item of expenditure) incurred or the premises in or upon

    the Centre which benefit from it or otherwise, the Landlord shall be at liberty in its

    discretion to adopt such other method of calculation of the proportion of such expenditure

    to be attributed to any relevant part of the Lettable Areas as shall be fair and reasonable

    in the circumstances, and in the exercise of the discretion the Landlord may if it is

    appropriate:

    2.3.3.1 attribute the whole of such expenditure to any part of the Lettable Areas [or

    adjust the weighting principles in their application to an item of expenditure]; and

    2.3.3.2 make special attributions of expenditure in the case of Sunday or other extended

    trading where only some traders in the Centre elect so to trade throughout the

    year, at certain times in the year, during public holidays or outside normal trading

    hours;

    and the Landlord is not required to take into account the length of the term or unexpired

    residue of the term of any tenancy of premises at the Centre, but the Landlord shall have

    regard to the interests of the tenants and occupiers from time to time at the Centre as a

    11class;

    2.4 The Landlord's Costs, the Service Charge and the provision of the Services shall be

    calculated and dealt with in accordance with the provisions of this Schedule. 2.5 [The [sinking and] reserve fund(s) shall be dealt with in accordance with paragraph 11.]

    3. ADVANCE PAYMENTS ON PRELIMINARY BASIS

    3.1 The Service Charge shall be discharged by means of advance payments to be made on

    12each of the usual quarter days in every year and also by such additional payments as

    may be required under paragraphs 4 and 5, the first advance payment in respect of the

    period commencing on [[ ] 20[ ] /[the grant of this Lease]] and expiring on the day

    preceding the following quarter day to be made on [the grant of this Lease].

    3.2 The amount of the advance payments shall be such sums as the Landlord may

    reasonably determine as likely to be equal in the aggregate to the Service Charge for the

    relevant Service Charge Period.

    3.3 The Landlord shall endeavour at least one month before the relevant Service Charge

    Period both to provide the Tenant with an estimate of likely service charge expenditure

    10 Landlords may not choose to include a "weighting schedule", which is usually found in a shopping centre context. 11 This paragraph addresses possible restrictions on service charge recovery highlighted by the case of Fluor Daniel Properties Limited v Shortlands Investments Limited [2001]. The Landlord, however, must have regard to the interests of the tenants at the centre as a class.

    12 Ensure consistency with any definition of Quarter Days in the rest of the lease. Also amend if different dates are designated for payment of the service charge.

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    and appropriate explanatory commentary, and to notify the Tenant of the advance

    13payment determination in accordance with paragraph 3.2.

    3.4 The Landlord shall, so far as is reasonably practicable to do so, endeavour to procure

    that the form and content of the estimate referred to in paragraph 3.3 reflects the

    14principles of best practice guidance contained in the Service Charge Code.

    3.5 Until the Landlord gives notification of the advance payment determination for the

    relevant Service Charge Period, the Tenant shall pay on account of each advance

    payment a sum equal to the amount of the last estimated quarterly advance payment in

    15the previous Service Charge Period, and within one month after the date of notification

    of the advance payment determination the Tenant shall pay the Landlord the amount of

    any shortfall in the relevant advance payments already made for the current Service

    16Charge Period.

    3.6 The Service Charge shall be deemed to accrue on a day-to-day basis in order to

    ascertain yearly rates and for the administrative purposes of apportionment in relation to

    periods other than one year, but not for any other purpose.

    3.7 Where part only of a Service Charge Period falls within the Term, the Tenant shall be

    liable for a proportionate part of the Service Charge for that period based on the number

    of days of that period falling within the Term.

    4. LANDLORD'S COSTS, STATEMENTS AND ADJUSTMENTS

    4.1 The Landlord shall, as soon as may be practicable [and, in any event, shall endeavour to,

    17within four months,] after the end of each Service Charge Period, submit to the Tenant a

    statement duly certified by the Landlord, the Landlord's Surveyor or the Landlord's

    18managing agents, reviewed by an independent accountant if the Landlord so decides,

    giving a proper summary of the Landlord's Costs and the calculation of the Service

    Charge for the Service Charge Period just ended, together with accompanying details of

    the sums paid in advance by the Tenant and any balance due from or to the Tenant, in

    order that the Tenant may come to a reasonable understanding of the calculation of the

    Service Charge.

13 While this paragraph accords with a specific recommendation of the Service Charge Code (see section 4.4), some landlords may regard the time constraint in the paragraph, as impractical.

    14 See section 4.4 of the Service Charge Code.

    15 If the Landlord is unlikely to have such an estimate, the lease should contain a specified amount for the initial advance payment to avoid any uncertainty.

    16 A Tenant may seek to amend this to provide that any balance is paid by equal instalments on the remaining quarter days during the current service charge period.

    17 This four month time limit is consistent with the Service Charge Code, but some landlords will regard it as impractical. 18 Auditing of the service charge statement should be carefully considered in view of the amount of due diligence that the auditor may potentially require in the light of modern auditing standards (see section 4.2 of the Service Charge Code for further information). For that reason, paragraph 4.1 does not refer to the statement being audited by the Landlord's auditors.

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    4.2 The Landlord shall, so far as is reasonably practicable to do so, endeavour to procure

    that the form and content of the Service Charge Statement reflects the principles of best

    19practice guidance contained in the Service Charge Code.

    4.3 In respect of any balance of Service Charge referred to in paragraph 4.1:

    4.3.1 if the balance is due from the Tenant to the Landlord, the Tenant shall pay the

    balance to the Landlord within 14 days after the receipt of the Service Charge

    Statement by the Tenant;

    4.3.2 if the balance is due from the Landlord to the Tenant, the balance shall be set off

    against the next advance payments of Service Charge due from the Tenant, or, if

    20the Term has ended, shall be paid by the Landlord to the Tenant within 14 days

    after the submission of the Service Charge Statement to the Tenant. 4.4 The provisions of this paragraph 4 shall continue to apply notwithstanding the termination

    of this Lease in order to determine the liability (if any) of the Landlord or the Tenant up to

    the termination of this Lease.

    214.5 Within [four months] after the submission of the Service Charge Statement to the

    Tenant, the Tenant may challenge the Service Charge Statement by giving to the

    Landlord notice to that effect, but only if it has first made payment of the undisputed

    amount of any Service Charge that the Service Charge Statement shows as due from the

    Tenant and, if so:

    4.5.1 the Landlord shall deal with proper enquiries promptly and efficiently and the

    Landlord and the Tenant shall endeavour to resolve the relevant issue, but if they

    cannot do so;

    4.5.2 the issue in dispute shall be referred to the determination of an independent

    22expert:

    4.5.2.1 to be appointed by the parties jointly, or if they cannot agree an

    appointment by the President (or other acting senior officer for the time

    being) of the Royal Institution of Chartered Surveyors on the request of

    either party;

    4.5.2.2 who shall act as an expert and not as an arbitrator;

19 See sections 4.3 and 4.4 of the Service Charge Code.

    20 Ensure the lease has a definition of "Term" and amend where appropriate.

    21 Section 4.5 of the Service Charge Code states that the owner will allow occupiers a reasonable period (e.g. four months from issue), in which to raise enquiries in respect of the certified accounts/statement. Four months may be too long a period for some landlords.

    22 Ensure the expert determination provisions are consistent with any other such provisions in the lease. The parties should also consider including mediation provisions - the RICS intends that the Service Charge Code provides access to ADR for parties involved in disputes about service charge. See section 5 of the Service Charge Code.

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    4.5.2.3 whose determination will be final and binding on the parties except in the

    case of manifest error;

    4.5.2.4 whose fees and expenses (including the cost of his nomination) shall be

    borne as the expert determines (but in the absence of determination they

    shall be borne equally) and the Landlord and the Tenant shall each bear

    its own costs with respect to the determination, but either may pay the

    costs required to be borne by the other if they remain unpaid more than

    21 days after becoming due and then recover these and any incidental

    expenses incurred from the party in default on demand; and

    4.5.2.5 who, in the event of his refusing to act, becoming incapable of acting or

    dying, may be replaced by either party requiring the appointment of a

    replacement as provided in paragraph 4.5.2.1;

    4.5.3 such adjustments to the Service Charge Statement as may be required to be

    made in consequence of the determination of the expert shall be made and any

    sum due to or payable by the Landlord shall promptly be paid or allowed as the

    case may be; and

    234.5.4 Base Rate Interest shall be paid or allowed in respect of the period during which

    the relevant amount has been underpaid or overpaid;

    but, if not, the Tenant's right of challenge to that Service Charge Statement shall lapse.

    4.6 The Tenant shall be entitled on reasonable request to:

    4.6.1 inspect service charge documentation (including records and vouchers) of the

    Landlord at such location as the Landlord may reasonably appoint for the

    purpose during normal working hours on weekdays; and

    4.6.2 take copies of them at the Tenant's expense.

    5. UNBUDGETED EXPENDITURE

    5.1 If the Landlord is required in relation to any Service Charge Period to incur or actually

    incurs unbudgeted expenditure which forms part of the Landlord's Costs, the Landlord

    shall be entitled to recover from the Tenant the Due Proportion of the whole of that

    expenditure on the quarter day next following.

    5.2 If funds collected by way of advance payments towards Landlord's Costs prove

    insufficient to meet an immediate liability (and there is no appropriate [sinking or] reserve

    fund available or which may be applied to meet the liability), and the insufficiency does

    not arise from any of the causes specified in paragraph 5.3, the Landlord shall be entitled

    to advance monies (or borrow monies for the purpose from reputable banks) at

    23 Ensure this definition is consistent with other interest rate definitions in the lease.

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    commercially competitive rates of interest, and the interest payable on the advance or the

    borrowing shall be recoverable as an item of the Landlord's Costs.

    5.3 The causes mentioned in paragraph 5.2 are;

    5.3.1 any Lettable Areas are or have been vacant or occupied by the Landlord;

    5.3.2 there are shortfalls in the recovery of contributions from a tenant or other

    occupier of the Due Proportion of the Landlord's Costs attributable to any part of

    the Lettable Areas by reason of the tenant or occupier being in default or not

    being obliged to pay (whether as a result of a service charge cap, formal

    concession or otherwise).

    5.4 Where the Landlord carries out major works of repair, maintenance and decoration or

    replaces major items of plant or machinery, it may, at its discretion, apportion the

    Landlord's Costs in respect of the relevant expenditure over more than one Service

    Charge Period and charge interest at commercially competitive rates of interest, which

    shall be recoverable as an item of the Landlord's Costs.

    5.5 The Landlord shall give notice to the Tenant as soon as reasonably possible after

    becoming aware of the need to incur unbudgeted expenditure.

    6. ADVANCE PAYMENTS ACCOUNT

    6.1 This paragraph 6 applies to that part of the monies (“relevant monies”) paid by the Tenant

    and other tenants and occupiers of the Centre by way of Landlord's Costs, which has not

    yet been disbursed or appropriated in payment of the costs and expenses of providing

    Services in and to the Centre.

    6.2 The Landlord shall keep (or procure that the Landlord’s Surveyor or Landlord’s managing

    agents shall keep) the relevant monies in a separate trust account until and to the extent

    that they may be required for disbursement or appropriation in payment of the costs and

    expenses of providing Services in and to the Centre.

    6.3 Interest earned on such account (less any tax payable) shall be credited to the account at

    regular rests in each year.

    6.4 Until and subject to actual disbursement or appropriation in accordance with this

    Schedule, the relevant monies shall be held by the Landlord on trust for the benefit of the

    owners, tenants and occupiers of the Centre as a class.

    7. LANDLORD'S PROTECTION PROVISIONS

    The Tenant shall not be entitled to object to the Landlord's Costs (or any item comprised

    in them) or otherwise on any of the following grounds:

    7.1 the inclusion in a subsequent Service Charge Period of any item of expenditure or liability

    omitted from the Landlord's Costs for any earlier Service Charge Period so long as the

    Landlord has acted in good faith, or the Landlord has otherwise exercised its discretion in

    accordance with paragraph 5.4;

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