What should we do if a leaseholder does not pay their 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.

The landlord or resident management company will be required to collect the service charges and therefore should initially try proactively to seek to get them paid, for example, finding easy ways for payments to be made, i.e. direct debit or making a concession as long as a precedent is not set.

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

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.

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.

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 further information is requested from the leaseholder you must allow them sufficient time to provide the information to you. If the Civil Procedure Rules (CPR) are not followed then the court could possibly strike out the claim. However, a strike out would be rare as your solicitor will have ensured before issue of any court claim that all relevant notices and invoices had been served and 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, you or you 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 recovery 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 companies requirements. Mortgage companies can be made aware of the debt, as 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.

Legal action is usually sought by seeking a judgment by the court (CCJ) which 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 a CCJ is granted by the court 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 and 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 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 – where monies are deducted regularly from the debtors salary;
  • Charging Order – where the debt is secured against land or shres in which the debtor has an interest;

Third Party Debt Order, requesting the monies to be paid by a third party who owes money to the debtor (often banks or building societies)

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