Service charge arrears but no mortgage now what?

Mortgage lenders can be used to recover monies owing but this is not always an option. Forfeiture is one solution says Richard Swaine – but always take specialist advice

Service charge arrears must be recovered quickly to avoid problems with cash flow and block management. If one person doesn’t pay, everyone suffers. On properties where there is a mortgage, provided the proper processes are followed (a specialist area on which it is safest and quickest to take specialist legal advice) the mortgage company is likely to discharge the arrears where the property owner does not, due to the threat to their security.

But what about situations where there is no mortgage to fall back on? To managing agents, their clients and the owners who do pay on time, arrears are arrears: they need a solution not an exclusion. It is no good to them if the arrears on the mortgaged properties are managed well to the exclusion of the non-mortgaged properties, because that doesn’t deal with the whole of the problem and can lead to cash flow and block management issues. It is also far from fair (one of the key ingredients to harmonious flat living) to be more relaxed about collecting these debts; the problem never gets better it just gets later.

At Swaine Allen we collect charges on properties with the same vigour, determination and drive whether or not they are mortgaged. However, that may not necessarily be the case across the board. Forfeiture (where ultimately the leaseholder loses their property if they do not put things right - including paying their service charges) is a powerful remedy but it is often perceived to be heavy-handed, which may make block managers wary of going down this route. As there are a number of statutory safeguards in place, in my view any reluctance to use forfeiture as a sanction is ill founded. However there is no doubt that the process is complex and a minefield for the uninitiated and specialist knowledge is a must. As an alternative, enforcing judgments can be used rather than pursuing forfeiture and this can be very effective in the right circumstances. Again this is a specialist area.

Finally, and perhaps most significantly, without a mortgage company in the background, some solicitors can be reluctant to enter into an arrangement that means they will have to wait for their fees. This can create a chicken and egg situation where significant money needs to be spent upfront to take a matter forward.

We would advise block managers to find a solicitor that is willing to wait for their fees and recover them directly from the debtor. At Swaine Allen we take that approach, which means our clients never need worry about their legal costs - there will be no surprises. Where this is not possible we inform clients in advance of any costs they will have to pay which means they can take the decision whether to proceed or not. If it doesn't make commercial sense for them to pay the costs they tell us not to proceed. They will have nothing to pay and they will have had the benefit of our expert assessment of their case free of charge.

Richard Swaine
Operations Partner
Swaine Allen Solicitors