External Service Charge Collection and Enforcing a Judgement
Some managing agents will use their own solicitors to carry out the role of collecting service charge arrears when the in-house procedure has failed and if this is what has been agreed in the management agreement. Others will take instruction from the RMC Directors (or their officers) who will refer the debtor to their own company Solicitor.
Which is what happens on my block, the process of which is as follows:
1: Letter Before Action
This will usually give 14 days for a lender to respond. The cost of the letter will usually include receiving instructions, opening a file and any other relevant correspondence with whoever instructs them. This is not a strict time limit process and is in some respects up to the managing parties discretion.
2: Second Letter Before Action
If there is no reply then a second Letter Before Action can be sent, followed by a payment proposal, depending on why the arrears have accrued. This is important to establish because sometimes a change in personal circumstance such as redundancy, being too ill to work, being on a low/fixed income or having no savings to fall back on means that leaseholders simply cannot afford to pay. The managing agent should have already been advised of this, particularly if the situation is likely to be ongoing. Regular updates should be provided and if the problem is ill health preventing a return to work, then sick certificates and GP letters should also be submitted.
Other reasons could include:
- Leaseholders disputing the service charges on grounds of validity, reasonableness or legality;
- A lack of understanding of the legal requirement to pay when a leaseholder dies and the estate is being handled by family;
- Accounting failures where the incoming payments may have been posted to the incorrect leaseholder account;
- Incorrectly addressed demands;
- New leaseholders (or their solicitors) failing to serve the required notices stated by the lease during the conveyancing process;
- A simple oversight.
Back to the letters and it is important to be aware that they must meet basic criteria under the Civil Procedure Rules (CPR) Practice Direction Pre-action Conduct and Protocols.
A letter that warns of imminent legal proceedings should contain the following:
- A clear and concise summary of the facts and what the claimant is seeking;
- A reference to where legal advice can be obtained;
- A reasonable time frame supplied for a reply and with a specified date;
- A statement that informs the recipient that should no reply be received by a specified date that proceedings will be commenced with no further notice;
- A reasonable time frame given for investigation and reply should the recipient request some additional information.
3: Approach The Mortgage Company Directly
The mortgage company will be approached directly and the cost of this can include 3 letters, and any additional correspondence/telephone calls with the mortgagee. One such letter will be a copy of the Letter Before Action which will sometimes result in them paying the amount outstanding to avoid the risk of the lease being forfeited.
4: County Court Proceedings
If this still does not yield results legal action can be taken in the form of seeking a judgement for the debt through the County Court. Proceedings will be issued and enforcement measures are also available. At all stages of the process an attempt should be made to ascertain whether or not the leaseholder accepts the claim and intends to mount a defence as this will determine whether the matter will be dealt with by the county court or the FTT which carries implications in terms of the recovery of the costs of the proceedings. If the claim is successful (which ours was) then this is followed by a charge for entering a judgement in default which hopefully will include an award of interest on the arrears and an amount toward the cost of the proceedings. The leaseholder can either choose to settle or the judgement can be sent to the mortgagee for payment in the hope that they may be more inclined to pay if a judgement has been entered. The mortgagee could also arrange to pay the debt by instalments.
ENFORCING A JUDGEMENT
If a judgement has been made in favour of the freeholder and there has still been no payment it then becomes necessary to enforce the judgement through one of the courts, the principle enforcement methods being as follows:
1: Warrant of Execution
When a Warrant of Execution is submitted to the court they will then instruct Bailiffs to visit the property. Where the property is a leasehold flat then the bailiffs will send a report to the freeholder or the managing agent, advising on how many times they visit and what happens, such as who’s at home (or not). It may be possible that the leaseholder has assets that could be siezed to pay the debt but this could only work if the assets were owned outright, not on any credit agreement. They will also advise any sub-tenant they speak to, to contact their landlord to inform them they have had a bailiff visit. The bailiffs will not at this stage force entry and will report that the property is a rental. This is when the freeholder/managing agent will be able to proceed with a third party order to clear the arrears direct from the tenants rent or the landlords bank account. The latter however may not work if there is no sufficient credit in the account.
At present if there is a debt of more than £5,000 (which was increased from £750.00 as of 1st October 2015) the lessee can be petitioned for bankruptcy. The difficultly with bankruptcy is that you will be required to personally serve a Statutory Demand on the lessee before issuing a Bankruptcy Petition. The Bankruptcy Petition will also need personally serving.
If a Bankruptcy Order is made a Trustee in Bankruptcy will be appointed who will then deal with the assets and liabilities of the bankrupt lessee and make payments, (assuming there are funds in the bankruptcy estate), to creditors in a particular order. As the Petitioning Creditor, whilst some costs may be recovered, debts are paid off in in priority to other creditors so the main element of the debt will rank lower down the order as an unsecured creditor. This is a very heavy handed option and it comes with a high level of costs and risk. There is always the risk that whilst time and money will be undoubtedly spent petitioning for the lessee’s bankruptcy if there are no funds to pay anyone, or if there are funds available, they may well not be enough to pay the unsecured creditors.
3: Attachment of Earnings Order
An employed debtor could have regular payments deducted from his salary to pay the debt.
4: Charging Orders
This is the option we chose to proceed after a judgement was made in our favour from the court. We sent it to the leaseholders lender and when we did not get any response we got an interim charging order registered against the property. We then got a full charging order levied against the property which would stay until the property was sold or re-mortgaged. We did however instruct it to be removed when the lender paid in full.
Having said that though, the arrears are accruing again so we are now considering what to do next.