Leasehold service charge: what to do if it doesn’t get paid?

The terms of the lease require the leaseholder to pay the leasehold service charge. Likewise, the lease determines in advance the ground rent of the anticipated year’s expenditure. Any non-payment will result in a breach of the lease.

The landlord or resident management company must collect the leasehold service charge. Therefore, they should initially try proactively to seek to get the payment. For example, you can find easy ways for payments, i.e. direct debit or make a concession as long as a precedent was not set.

Many leases allow the landlord to charge late payment fees where leaseholders breach their lease by late payment.

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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, 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 you to charge interest on unpaid leasehold service charge. This often encourages to make payments in a timely manner. A typical lease will specify a late payment interest rate of around 4% above base rate.

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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 the 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 seem to be unreasonably high.

A variety of reasons can often delay the payment of the leasehold service charge.

For example:

  • when someone has died,
  • a property has been sold
  • or a leaseholder is made redundant,
  • an investment landlord cannot attract a tenant

Therefore, it is important that the landlord, Managing Agent or Residents Management Company (RMC) investigates proactively.

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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 the leasehold service charge 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 in case of no payment
  • Second reminder – 21 days after the due date advising that you will initiate legal action 7 days after the date of this letter.
  • Legal action initiated – after 28 days.

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 you can make a suitable concession.

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Prior to the legal action, the letters provided to the defaulting leaseholder must be clear and concise. They must refer the leaseholder to the availability of legal advice. Also, they must provide a reasonable time for the leaseholder to respond. They will also 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. If you’re not following the Civil Procedure Rules (CPR), then the court could possibly strike out the claim. Your solicitor will have ensured before the issue of any court claim to serve all relevant notices and invoices. So, a strikeout would be rare.  At that time, there is unlikely to be any scope for a dispute upon commencement of court proceedings.

When considering instructing a solicitor to act on behalf of the RMC, consider instructing a firm that specialises in the recovery of the leasehold service charge.

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. Therefore, they will not charge any upfront fees to the RMC. In fact, they will be able to recovery their professional legal fees from the late paying leaseholder so long as the lease allows this – the vast majority of leases do.

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Where flats and apartments are subject to mortgages, the leaseholder will not only be breaching the terms of their lease but also the mortgage companies requirements. You can inform mortgage companies of the debt. They will be 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.

You can seek legal action usually by seeking a judgment by the court (CCJ). This may award the monies owed plus fixed costs (for claims under £5,000) and late payment interest to be paid by the defaulting leaseholder. Once the court grants 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, your solicitor will often give the mortgage provider a further opportunity to protect the mortgagee’s interest. They can pay on behalf of the leaseholder the full amount owing including the solicitor’s costs, interest, administration charges and, of course, all the arrears of the leasehold service charge and ground rent.

If the leasehold service charge payment still remains outstanding, a number of the following enforcement measures are available:

  • “Warrant of Execution” by the court’s bailiff to seize goods to the value of the debt;
  • An Attachment of Earnings Order deducts monies regularly from the debtor’s salary;
  • A Charging Order secures the debt against land or shares in which the debtor has an interest;
  • A Third Party Debt Order requests that a third-party who owes money to the debtor (often banks or building societies) pays the monies

Most claims under £5000 are dealt with as small claims in the County Court.

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Please contact Pelin Martin to book a 30-minute free property consultation on +0208 994 7327 – pm@bluecrystallondon.co.uk

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