Collecting Service Charges
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. This is 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.
EXTERNAL ARREARS COLLECTION
Some managing agents will use their own solicitors to carry out the role of collecting service charge arrears when their own 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 the lessee 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.