What to do about service charge arrears

The Credit Crunch, Credit Control and Zero Tolerance

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

January is the busiest month for service charge demands and RMC directors and managing agents are finding out this month that non payment is increasing. Undoubtedly block management 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 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 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.

Author: Neil Shearing, Principal Solicitor of SLC Solicitors Web site: www.servicechargesarrears.com - Telephone: 0845 1 700 700