Service Charge Arrears and Credit Control

In these days when ‘the credit crunch’ is a well used expression, it has never been more important for property managers to make sure that directors of self-managed residents’ management companies (“RMCs”) and managing agents keep firm control of service charge credit control procedures.

This year is proving to be a busy year for credit controllers as non payment of service charges is on the rise. Undoubtedly the ability of property managers to manage a block is affected as money becomes less readily available and reduced levels of maintenance and services are experienced by leaseholders. As if that were not bad enough, such reductions in services can lead to downward effect on property values and decrease further any remaining equity available to leaseholders.

Credit control and the service charge demand process

The process of ensuring prompt collections has not changed because of the current economic climate. However, the increased amount of time devoted to the collection process has placed RMC directors and managing agents and their property managers under increased pressure from paying residents who rightly expect block maintenance and services to remain high.

When a demand is not paid on time it is crucial that a polite reminder is sent to a leaseholder as promptly as possible. In the continued absence of payment a leaseholder should be warned of the possibility of legal proceedings being commenced and a solicitor instructed.

Late Payment Administration Charges and Interest

Importantly during the process of serving service charge demands and chasing reminder letters (with accompanying notices relating to tenants’ rights and obligations – s.153 and 158 Commonhold & Leasehold Reform Act 2002), RMCs and managing agents and their property managers should ensure that any slow payers are penalised with late payment administration charges when appropriate. These charges will go some way to recovering monies for the additional time spent chasing payment. The legislation merely states that such charges should be reasonable.

Usually a lease will allow interest to be charged to leaseholders who delay payment – typically the interest rate quoted within a lease is 4% above base rate.

Instructing Solicitors – recovering the legal costs from the leaseholder

Most modern leases allow also for the recovery of solicitors’ costs from a leaseholder when a solicitor is instructed to recover any arrears. With this in mind, RMC directors and managing agents can expect that all legal fees on undisputed cases are paid by the leaseholder – not the RMC. As such, the legal costs are not absorbed into any subsequent service charge demand to all leaseholders. The ability to recover legal costs allows for the outsourcing of arrears to solicitors at no cost to an RMC. With this cost comfort in mind RMC directors and managing agents are able to adopt a zero tolerance to the collection of arrears of service charges.

The natural consequence of a strict credit control approach to service charge collections ensures that arrears are reduced relatively quickly and block management is improved as funds become more readily available to block managers – even during a credit crunch – thereby making the lives of property managers so much more bearable.

Neil Shearing, Principal Solicitor of SLC Solicitors
0845 1 700 700