Service charge means different things in different industries. For example, in the banking industry, it is a monthly charge to account holders to maintain their accounts. When booking a flight, a service charge is added to your total cost, covering expenses for entertainment, baggage handling, etcetera. In real estate, a service charge is money paid by the leaseholder (tenant) to the landlord for the services the landlord is obliged to provide under the lease terms. In essence, it is money charged for services rendered and is often included in the total rent on a property.
What are these services?
While the scope of service charges differs with every property or estate, they typically cover the cost of energy, maintenance, and repairs. This can include the cost of diesel, generator maintenance, gardening, plumbing issues, building insurance, etcetera. The service charge does not cover the personal choices of the tenants, such as redecorating; instead, it covers those services that are required to make the facility/estate function smoothly.
Tenants should always check their lease agreement for the details of any service charge and ensure that they are aligned with these details before signing the lease. For example, a lease agreement might stipulate that the money only covers the cost of landscape maintenance, water, energy supply, and security.
How much is the service charge?
The service charge varies with every building and estate. It is calculated by estimating the cost of providing the specified services and splitting it among the leaseholders. For example, if it takes 200 million naira a year to provide essential services for 200 houses within an estate, then the service charge for each home is 200 million naira divided by 200 houses which results in 1 million per year for each house.
While tenants might have reservations about the service charge, they cannot deliberately remove this charge from their rent.
Why do service charges keep getting more expensive?
Given the current state of inflation in the country, facility management has become challenging, and service charges are becoming stressful for tenants and landlords. It is getting increasingly expensive to provide services in Nigeria, hence service charges have increased in most industries. Take, for example, the fuel scarcity that has happened intermittently throughout 2022 – this year alone, the cost of diesel has seen over 200% increase, and facilities providing energy to the tenants have had to deal with this. It means that even the service charges allocated for a year’s diesel supply will barely be enough for a few months.
What can be done about this situation?
First, intending tenants should read their lease agreement thoroughly to understand the specifics of the service charge on a property they are about to rent. As a tenant, you should always request a report on how the money was spent every year. A third party often prepares this report. If your landlord spent less than the service charge, the extra money should be credited in the next payment, while if more money was spent, the landlord might recover the arrears through a “balancing charge.”