Recovering Legal Costs from Leaseholders
If the freeholder is going to pursue non-payment of service charges which is highly likely then they are going to be responsible for the initial outlay.
Many old leases (i.e. written before 1996) will not contain a specific clause applicable in this situation. Some, such as my own simply state that the Lessee is ‘to pay the Lessor all costs, charges and expenses (including legal costs and fees payable to a Surveyor) which may be incurred by the Lessor in (or in contemplation of) any proceedings under s146 (restrictions on and relief against forfeiture of leases and underleases) and s147 of the Law of Property Act 1925′ (relief of notice to effect decorative repairs). Whilst it may be arguable that issuing a claim for the payment of the service charges and ground rent is a precursor to forfeiture proceedings using it as an argument to for recovery must be given very careful consideration as a) it may be challenged which will increase costs and b) forfeiture (the taking back of the lease before its natural expiry) may ultimately prove to be unworkable.
However under s146(3) of the Law of Property Act 1925 an obligation is imposed on all leaseholders to pay the “reasonable costs and expenses properly incurred by the lessor in the employment of a solicitor and surveyor or valuer or otherwise in reference to any breach giving rise to the right of re-entry or forfeiture”. This obligation is regardless of whether the lease allows the recovery of legal costs from an individual leaseholder or not.
Technically such costs are classed as administration charges and providing that recovery is reasonable then they can be recouped from the individual. This is not to be confused with costs recouped as a service charge paid on an apportioned basis by all leaseholders.
In cases where the lease reserves the service charge as rent and provides that it is recoverable as rent, there is no need to serve a section 146 notice as a precursor to forfeiture proceedings in the event of non-payment. Such service charges nevertheless fall within the statutory definition of “service charges” under s18(1) of the Landlord and Tenant Act 1985 and are therefore subject to statutory protection. Consequently, forfeiture of the lease for a non payment of service charges reserved as rent is subject to restrictions on forfeiture that are imposed by s81 of the Housing Act 1996. These largely mirror the requirements of s168 of the 2002 Act. This same section also contains provisions allowing recovery of the Landlords costs, specifically ‘a lessor shall be entitled to recover as a debt due to him from a lessee, and in addition to damages (if any), all reasonable costs and expenses properly incurred by the lessor in the employment of a solicitor and surveyor or valuer, or otherwise, in reference to any breach giving rise to a right of re-entry or forfeiture which, at the request of the lessee, is waived by the lessor, or from which the lessee is relieved, under the provisions of this Act’.
CAN’T PAY OR WON’T PAY?
There are two distinct categories of leaseholders who fall behind in their service charge payments: some who can’t pay and some who won’t pay.
The first scenario can be where the leaseholder may have hit financial difficulties resulting from issues such as being made redundant, suffering ill-health or both. Falling into arrears in this kind of situation is a) not a deliberate withholding of payment and b) not a deliberate breach of the lease covenant but the fact that such serious changes in circumstances further down the line (sometimes many years down the line) may well put the ability to continue to meet payment obligations into the waste-bin. This is no different to a radical change in circumstances when a mortgage or a credit card was taken out as most people enter into them in good faith.
The second (and the absolute worst) are those that simply don’t want to pay. They don’t offer any explanation, and they don’t use their right to challenge the charges through the courts if they feel they are unreasonable. They deploy all sorts of delaying tactics and when placed under pressure they may enter into a payment plan but renege on it, again with no explanation. They may even pay simply when they feel like it!
I have personal experience of falling behind with service charge payments due to my partner being made redundant and him having both mental and physical health problems. Our managing agent gets regular e-mails about our financial affairs, along with my partners sick certificates and hospital release forms and because we take the issue seriously we also have a charge placed against our property where our mortgage lender covered a shortfall some time back.
My advice would be that if leaseholders’ fall into the first category, they should first tell the freeholder or managing agent! Unless these parties are advised, they will continue to send out demands (which usually contain a threat of legal action) without having the slightest idea what the lessees are having to deal with and as a result inadvertently worsen their already existing conditions!
If the inability to pay is very short-term, again, tell the relevant parties. You may well be able to likely to arrange a payment plan to take off the heat!