Service Charge Arrears – Struggling to receive payment and need options?
Service charge arrears is something a lot of Freeholders and Management Companies have to deal with as a common occurrence. Sometimes, this will be a leaseholder who is generally struggling financially, or a leaseholder who continually breaches their obligation to pay rent, which can sometimes lead to a vicious circle of demands and legal action.
Service Charge Demands
You should ensure that your service charge demands are valid and have been served correctly on the leaseholder. For example, this must be served on the correct and current leaseholder at their correct address. There are standard provisions within your lease which will place an obligation on the leaseholder to inform you of any changes/ownership of the leaseholder properties.
You should also check your lease for the method of service and any requirements imposed around the service of such demands. Most leases will refer to Section 196 of the Law of Property Act 1925 – served at the last known address and by registered post. You must check the provisions of your lease.
To ensure that your demands are valid you should ensure that it contains the following information:
- Must contain the Landlord’s name and address (section 47 of Landlord and Tenant Act 1987). It is not sufficient to include the agent’s details on the demand instead. Do not put a care of address either, it must be the Landlord’s own address.
- Demands must be accompanied by ‘a summary of the rights and obligations’ (section 21B of Landlord and Tenant Act 1985).
This is very important as any costs stated within the service charge demand will not be payable by the leaseholder until re-served in the correct form. Re-serving your demand is a much cheaper option than arguing validity in Court.
You must ensure that all costs sought have been reasonably incurred, and that all works carried out are completed to a reasonable standard otherwise these costs are arguably not recoverable.
Limitation on recovery of costs via service charge demand.
You should ensure that you do not miss the time period which allows you to recover costs, otherwise you will be unable to recover the same from the leaseholders and may be at a financial loss.
Under section 20B of Landlord and Tenant Act 1985, you are unable to recover costs which have been incurred more than 18 months before serving your formal service charge demand. To avoid unrecoverable costs, you will want to monitor the dates of any works and the dates for service of your service charge demands under the lease. This will help ensure no costs are missed and become unrecoverable from your leaseholder.
Please note that there is one exception to this limitation which is that costs remain recoverable if you advise the leaseholders of those costs incurred in writing within the 18-month period and that they would subsequently be required to contribute to those costs by the payment of a service charge in accordance with their lease.
Commencing legal proceedings
You will need to obtain a monetary judgment from the Court before commencing enforcement proceedings such as forfeiture or an order for sale.
This matter may result in the claim being defended by the leaseholder and matters may become more complex and your proceedings being drawn out. However, you may not receive a defence and a monetary judgment is granted in default.
Once a monetary judgment has been obtained, this will need to be served on the leaseholder. If the arrears remain outstanding for another 14 days (usually), you will be able to seek enforcement proceedings by way of forfeiture (please see below for your eligibility to use this route) or an order for sale.
Are you able to forfeit the lease?
Due to the serious consequence of this route, you are likely to receive payment of arrears from the leaseholder, or their Mortgagee where applicable.
For you to commence forfeiture proceedings, you must satisfy the following conditions: –
- The lease must contain a forfeiture clause and this clause must be complied with.
- The amount of arrears exceeds £350 in total or has been outstanding for more than three years.
- You have no ongoing arbitration appeal which has been commenced in relation to the same issue. There will be a provision(s) within your lease which governs such arbitration requests.
- The Court has given final determination. As above, a monetary judgment has been granted. This will include monetary judgment granted in default.
In recent years, it has become increasingly difficult to purse forfeiture of a lease due to section 2 of Protection from Eviction Act 1977 which ensures that court proceedings must be brought when any person lawfully resides at the property otherwise forfeiture cannot be used.
In addition, section 146 of the Law of Property Act 1925 requires written notice to be served on the leaseholder informing them of their breach(es), request for them to remedy the same and request they pay compensation for the breach. This must be done before forfeiture proceedings are brought and the leaseholder will need to be given reasonable time to rectify the breach(es).
If you pursue this route, you must ensure that you do not waive your right to forfeiture. Basically, you will need to treat the lease as no longer existing and you cannot carry out any act which will arguably show that the landlord/leaseholder relationship is still in place.
For instance, you should not serve the leaseholder with any service charge demands, or deal with the leaseholder when carrying out emergency repairs. This is a strange notion, but you and any agents will need to act as if the lease does not exist if you wish to purse forfeiture of the lease formally.
If forfeiture is successful, you will essentially surrender the existing lease and the leasehold property will revert to the Freehold. Consequently, your leaseholder will no longer own the leasehold property and the freeholder will be able to grant a new lease over the property to a new leaseholder.
Are you able to purse an order for sale?
Yes, you can seek an order for sale once a monetary judgement is granted. However, there are a few hurdles which must be dealt with first.
The first step will be to apply for an interim charging order and pay the appropriate fee for this application. Within this application, you will need evidence that the leaseholder owns the property that you are seeking the charge against.
Once you have successfully obtained an interim charging order, this will need to be served on all relevant parties. This will need to be registered against the property’s title deeds to protect your position and the charge.
Provided sufficient time has lapsed from service of the interim charging order, you will then be able to apply to the Court for a final charging order. You will then have two options available to you: –
- You wait until the leaseholder decides to sell the property.
- You wait until you believe or know there is sufficient equity within the property.
- You apply to enforce the final charging order by seeking an order for sale.
Please note that the time limit of 6 years still applies for enforcement so be careful with your dates if you decide to wait.
Once your application has been made for an order for sale, this will be reviewed by the Judge, and they will have full discretion as to whether they wish to grant the order. If granted, then you will be able to conduct the sale of the property and ensure that your monetary judgement is settled. You will need to be mindful that there will be requirements regarding the sale, especially the market value at which the property can be sold.
If unsuccessful, your charge will remain registered against the property’s title deeds.
This process can be quite complex especially once you reach the conveyancing stage and recommend that your conveyancing solicitor is fully aware of the proceedings, any monetary judgments ordered (can be split across numerous Court Orders), and if necessary, they should discuss your matter with us.
Please do not hesitate to contact our team as we would be delighted to assist you with these matters and help you reach your desired outcome.
By Joanna Burke
Disclaimer: The content of any article posted on this website is for general information only and shall not be deemed to be, or constitute legal advice on any general or specific matter.