Collection of Service Charges In-House and the Eighteen Month Rule
It is usually the managing agent who collects the service charges and it is extremely important that they have a robust collection process in place because continual non-payment will have a serious impact on the ability of the freeholder or the agents to carry out all the services which the building requires.
Our managing agent’s process is as follows:
Day 1 – Invoice becomes due.
Day 7 – Telephone call and a reminder letter sent. It is important to note that whilst there is no legal obligation for such a letter to be sent it is considered fair to do so because the non-payment could be an oversight or it could be that the leaseholder has hit financial difficulties.
Day 21 – Telephone call and a stronger chasing letter.
Day 30 – Monthly Statement (sent at the beginning of each month).
Day 35 – Warning letter sent stating that the mortgage company will be contacted and legal proceedings will be instigated. The letter will read something like this:
‘Please be warned that if you miss any service charge payments you will be breaking your lease and possibly your mortgage agreement (if you have one). If you fall into debt we will tell your lender who may decide to pay this on your behalf. If this is the case they will add your service charge debt to the mortgage you still owe them and you will pay interest on the charge’.
Day 42 – Approach Land Registry to get details of mortgagee. If a mortgage is held then a pre-legal letter is sent to the mortgage company and to the debtor informing that the letter has been sent to their lender.
If no mortgage is held, then a pre-legal letter is also sent to the debtor. This means that this is the last chance to pay the debt and the debtor will receive a 7 day legal notice from a debt collector or a solicitor.
Day 56 – If the mortgage company is inclined to make a payment then they usually request between 7-28 days for their borrower to respond. If there is no response from the mortgage company or the debtor or the mortgage company declines to assist with payment (which they sometimes do on the instruction of the debtor) then approval for legal action is requested from the freeholder.
Day 63 – Assuming no payment has been received, legal action will then be commenced through either a debt collector, solicitor or a law firm specialising in arrears recovery.
EIGHTEEN MONTH RULE
Under s20b of the Landlord and Tenant Act 1985, where a landlord can’t (or doesn’t) for some reason send a demand for a service charge payment within 18 months, a section 20b Notice can be sent instead. Leaseholders are not liable to pay a service charge (regardless of the amount) unless a demand for payment is received within 18 months of a cost being incurred or (within that time-frame), the leaseholder receives written communication that a cost has been incurred. This will either be the date on which the landlord receives a demand for payment, or the landlord makes payment, whichever is first. It will also contain the amount and clearly state that leaseholders will be required to pay that cost as a service charge at a later date.
A demand under s20b will either be for payment for an estimated future service charge liability (in other words ‘on account’) or for costs which have already been incurred. It does not count where a service charge liability is an estimate or where the requirements of the lease are not met by the service charge invoice. A payment to a reserve fund is also not applicable under this piece of legislation.
In order for the Notice to meet the legal requirements it must contain at the time of writing a list of what costs have actually been incurred by the landlord relating to the leaseholder’s building or estate. These costs must only be the relevant costs because any non-chargeable areas where a leaseholder does not have to make a contribution fall outside of the legislation.
It must also contain every cost that the landlord intends to charge for because if they are not listed then again, the legislation requirements are not being met. Finally leaseholders must be clear that they are going to be charged a share of these costs as a service charge under their lease terms.
Case law has established at the Court of Appeal in the case of OM Property Management Ltd v Burr –  EWCA Civ 479 rules that costs are not “incurred” for the purposes of Section 20b of the Landlord and Tenant Act 1985 on the mere provision of a service or supply, but only when the liability has crystallised (whether on payment or presentation of an invoice). So the 18 month period runs from the date a Landlord receives an invoice rather than the date the services or works are supplied.