How to recover unpaid service charges
The leaseholder is required by the terms of their lease to pay the service charges and ground rent as determined by their lease in advance of the anticipated year’s expenditure. Any non-payment will result in a breach of the lease. But how do you recover outstanding Service Charges?
The landlord or resident management company must collect the service charges. They should initially try, proactively, to seek payment. For example, they may attempt to find easy ways for the leaseholder to pay. This could happen through direct debit or making a concession, as long as there is no precedent.
Many leases allow late payment interest fees to be charged by the landlord. This happens where leaseholders breach their lease by late payment.
What are Service Charges?
If you are a Residents Management Company, a Managing Agent, or even a Landlord, then statistically, service charge arrears are the main causes of disputes between freeholders and leaseholders.
A service charge is the cost of providing services for a property that usually contains multiple dwellings.
In the vast number of cases these charges are ‘fair and reasonable’ and expected by the leaseholder and usually include some or all of the following:
- General maintenance.
- Building Insurance.
- Security, heating, cleaning, and lighting of shared areas.
- Landscaping and general gardening.
- Provision and servicing of lifts.
- Management Costs.
- Reserve fund contributions.
The terms of the lease instruct the leaseholder to pay these charges. Non-payment results in a breach of that lease.
In law, there is a lot of protection for the leaseholder over the fairness and reasonableness of these charges. Also, no strict procedures exist around how to levy them.
What happens when Service Charges remain unpaid?
All this being said, it is a fact that service charge demands are not paid and it is imperative that these are recovered in a timely manner to ensure cash flow remains healthy and for the benefit of the other leaseholders who have paid.
Since the Commonhold and Leasehold Reform Act 2002 came into force it has become possible to levy variable administration charges for breaches of a lease, such as late payment, even if the lease does not specify this. When advising a leaseholder of an administration charge it is necessary to ensure that the leaseholder also receives a notice of the Tenant’s Rights and Obligations (Administration Charges). As the charge is variable this simply means that whatever administration fee is levied it must be reasonable.
Interest charges – Leases often allow interest to be charged on unpaid service charges which often encourages payments to be made in a timely manner – A typical lease will specify a late payment interest rate of around 4% above base rate.
If your lease does not contain this option then you may be able to apply to the First-tier Tribunal (FTT) for a variation of lease under Section 35 of the Landlord and Tenant Act 1987 – they will need to be seen as fair and reasonable. Equally the FTT can prevent landlords requesting interest charges if they are seen to be unreasonably high.
Delayed Service Charge payments and debt recovery
Often the payment of service charges can be delayed for a variety of reasons, for example when someone has died, a property has been sold or a leaseholder is made redundant, an investment landlord cannot attract a tenant, and therefore it is important that the landlord, Managing Agent or Residents Management Company (RMC) investigates proactively.
Where debt recovery is necessary it is best to follow a clear and strong procedure ideally with a zero tolerance to late payment explaining to all leaseholders in very clear terms why payment of service charges is so crucial to the running of their development, its maintenance and with that the maintenance of the apartments market value. We would recommend the following procedure:
- Reminder letter – 14 days after the due date, explaining the procedure that will follow if payment is not made.
- Second reminder – 21 days after the due date advising when legal action will be initiated 7 days after date of this letter.
- Legal action initiated – after 28 days.
More on legal action
At each stage of the request for monies due it is best to offer the leaseholder the opportunity to discuss the outstanding monies to see whether a suitable concession can be made.
Prior to legal action the letters provided to the defaulting leaseholder must be clear and concise, refer the leaseholder to the availability of legal advice, provide a reasonable time for the leaseholder to respond and state what will happen if the date passes and the debt remains unpaid. If the leaseholder requests further information, you must allow them sufficient time to provide the information to you.
You must follow Civil Procedure Rules (CPR) in order for the court to not strike out the claim. A strikeout is rare though, as your solicitor must ensure that you received all relevant notices and invoices before issuing a court claim. If not, there may be scope for a dispute upon commencing the court proceedings.
When to instruct a solicitor?
When considering instructing a solicitor to act on behalf of the RMC, you or your managing agent should consider instructing a firm that specialises in the recovery of service charges. A specialist law firm understands the need to turn around the arrears situation as fast as possible for the benefit of all the leaseholders and the continued good management of the estate. Some law firms will work on a no recovery no fee basis and will not charge any upfront fees to the RMC as they will be able to recover their professional legal fees from the late paying leaseholder so long as the lease allows this – the vast majority of leases do.
Where flats and apartments are subject to mortgages, the leaseholder will not only be breaching the terms of their lease but also the mortgage company’s requirements. Mortgage companies can be made aware of the debt. This is because they are keen to protect their investment to avoid any possible forfeiture of the lease and the loss of their security. They may even offer to add the debt to their clients’ mortgage with or without a leaseholder’s consent.
When to seek legal action
You can seek legal action by seeking a judgment by the court (CCJ). This may award the monies owed plus fixed costs (for claims under £5,000). Also, the defaulting leaseholder must pay late payment interests. Once the court grants you a CCJ, your solicitor has a variety of options to enforce the court’s order.
In most cases, if there is a mortgage on the property it is likely that the mortgage provider will be given a further opportunity by your solicitor to protect the mortgagee’s interest. In this case, the mortgage provider can pay on behalf of the leaseholder. They will pay the full amount owing. This will include the solicitor’s costs, interest, administration charges, and all the arrears of service charges and ground rent.
If payment still remains outstanding following the court’s determination a number of the following enforcement measures are available:-
Warrant of Execution” by the courts bailiff to seize goods to the value of the debt;
- Attachment of Earnings Order. Here monies are deducted regularly from the debtor’s salary.
- Charging Order. This is where the debt is secured against land or shares in which the debtor has an interest.
- Third-Party Debt Order. In this case, a third party who owns money to the debtor (often banks or building societies) pays the debt.
The County deals with most claims under £5,000 as small claims.
Come and talk to us. If you have any questions on property or block management, please contact Pelin Martin to book a 30-minute complimentary property consultation on +0208 994 7327 – firstname.lastname@example.org