Mixed-Use service charges: Getting apportionment right under residential and commercial scrutiny

Mixed-use assets bring opportunity, diversity, and flexibility. They also bring complexity, particularly where service charges sit across mixed tenure occupiers operating under different legal and governance frameworks.

For owners, operators, and managing agents, overseeing service charge apportionments in mixed-use schemes is not simply an accounting exercise. Failure to get apportionments right can cause ongoing financial and management issues. Increasingly, it is an area of heightened challenge, driven by rising costs and increasing service requirements such as those designated by the Building Safety Act. It is imperative that a mixed-use development has a well-considered and fair apportionment methodology to minimise the risk of challenge from tenants.

There are three essential elements to keep in mind when setting up or reviewing apportionments across any development: Legislation, the leases and the RICS Codes of Practice. This article will set out the framework that needs to be adhered to, practical risks, and the principles that matter most when apportioning service charges in mixed-use developments.

The Lease

The lease is the guiding document and first port of call when looking at apportionments of service charges. Every scheme should begin with a clear understanding of what each lease permits, how services are defined, whether apportionment is fixed or discretionary, and whether separate schedules are required. If the basis of measurement is unclear or no basis is stated, landlords and managers must adopt a reasonable and justifiable approach.  

Legislation and Case Law

Legislation protects tenants from unfair and unreasonable costs. Section 19 of the Landlord and Tenant Act 1985 states that costs are only payable to the extent that they are “reasonably incurred” and that the provision of services or works must be to a reasonable standard.

There are a number of important cases to be aware of that concern apportionments as Section 27A allows landlords or residential leaseholders to apply to the First-tier Tribunal (Property Chamber) to determine if a service charge is payable, by whom, to whom, the amount, and the date it is due. The function of this clause in relation to apportionments was clarified in the case of Aviva Investors Ground Rent GP Ltd v Williams and others (2023) where it was determined that the landlord can vary service charge proportions where permitted in the lease, provided that they act reasonably.

Following this, the 2023 case of Hawk Investments v Eames and Ors determined that although landlord's do have the discretion to make apportionment decisions affecting service charges, the FTT still retains its powers to protect leaseholders where the landlord attempts to do so against the provisions of the lease.

The RICS Codes of Practice

The RICS professional statement Service charges in commercial property (second edition) reinforces expectations around transparency, timeliness, cost classification, and governance. The requirement for transparency of cost allocations for commercial premises is more comprehensive than residential. Therefore Landlord’s must be mindful that disparities in explanation and reporting where two or more sets of occupiers pay towards overlapping services can undermine confidence, even if the underlying costs and apportionments are justifiable.

Whilst the RICS Service Charge Residential Management Code 3rd edition does not override leases, it is frequently referenced as a benchmark for expected competence. The code promotes the use of different schedules for different cost drivers and reinforces the need for a rational connection between cost and benefit. It recognises that, depending on lease terms, the basis and method of apportionment should be demonstrably fair and reasonable, reflecting availability, benefit, and use of services.

Why Mixed-Use Service Charges Are a “Minefield”

RICS has described mixed-use service charges as a potential minefield, reflecting the reality that residential and commercial occupiers sit within fundamentally different legislative and governance frameworks. This supports the case for bespoke mixed-use apportionment methodologies. Informal practices may function in the short term, but they are difficult to defend when challenged.

What Stands Up to Scrutiny?

While there are no universal rules for mixed-use apportionment, certain practices will align with statutory expectations and professional standards.

1)   Robust Service Charge Set Up

Separating estate-wide, building-specific, residential-only, commercial-only, and plant or utilities cost centres is essential. This structure underpins the ability to demonstrate benefit and use.

2)   A Bespoke or Hybrid Approach may be required

Different services justify different approaches. Area-based apportionment may be suitable for certain building and estate services. Footfall or hours of operation may be more appropriate for security or cleaning. Engineering-based allocation is often necessary for central plant, while metering remains best practice for utilities where feasible.

3)   Change control

Changes of use, reconfiguration, new amenities, extended hours, or plant replacement all affect the reasonableness of existing allocations. Without consistent review, previous assumptions on apportionments can quickly become invalid.

4)   Transparency and logic

Apportionments must have method, logic and reasoning behind them. Assumptions, informal practices, or legacy methodologies that are not clearly documented are unlikely to withstand inspection. “This is how we have always done it” is not an evidential defence. It is important to have a strategy written down and shared with residents. Any changes to this over time must also be communicated.

Final Thoughts: Governance Is Not Optional

At SAY we have advised our clients on apportionment strategies at all stages of building occupation – from the initial set up to apportionment reviews on buildings that have been running for many years. Our advice can help resolve leaseholder complaints and our clients find it valuable that we are an independent third party, ensuring the strategy is considered and reasonable.

For operators and asset owners, the most resilient schemes are those where apportionment is designed deliberately, documented clearly, and reviewed regularly. Where governance is strong, challenges are easier to manage, relationships are more constructive.

At SAY Property, we see service charge governance not as a compliance burden, but as a foundation for transparency and trust. In mixed-use environments especially, that trust is what allows places, and the communities within them, to thrive.