Arrears and Collection
It is usually the managing agent who collects the service charges and all demands are required to have an accompanying notice (summary) relating to tenants’ rights and obligations under s153 of the Commonhold and Leasehold Reform Act (notice to accompany demands for service charges). The same applies for administration charges under and s158 of the same Act (administration charges). If they are not provided then leaseholders have the right to withhold payment, and any provisions in the lease relating to non-payment (or late payment) do not have effect as long as the landlord remains in breach of these obligations. Note: This section of the 2002 Act came into effect on 1st October 2007.
So why do leaseholders get into arrears and end up breaching the terms of their lease? Changes in personal circumstance such as redundancy, being too ill to work (this is where sick certificates, GP letters, copies of any hospital admittance and release forms should be provided) being on a low/fixed income or having no savings to fall back on can happen to anyone and the result is exactly the same as falling behind with credit cards or mortgage payments. Why? Because a long lease is also a contract and just like you would advise your mortgage lender as soon as possible that there is a problem, you should also advise your freehold RMC or the managing agent. Unless they are advised, they will continue to send out demands (which usually contain a threat of legal action) and add their own administration charges, (if the lease allows it) without having the slightest idea what situation is and, as a result, inadvertently worsen their situation.
Other reasons for falling behind could be:
- Leaseholders are disputing the service charges on grounds of validity, reasonableness or legality;
- When a leaseholder dies and the estate is being handled by family;
- Accounting failures such as where the incoming payments may have been posted to the incorrect leaseholder account;
- Demands are incorrectly addressed;
- New leaseholders (or their solicitors) failing to serve the required notices stated by the lease during the conveyancing process;
The following example is the process enacted by our own managing agent:
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 ask for 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 help with payment (which they sometimes do on the instruction of the debtor) then legal action would be requested from the freeholder.
Day 63 – Assuming no payment has been received, the next step is now that of adhering to the Debt Pre-Action Protocol which came into effect on 1st October 2017. It has not been specifically written for leaseholders in arrears, rather they have been included within it.
Case law has established at the Court of Appeal in the case of Burr v OM Property Management  EWCA Civ 479 that costs are not “incurred” for the purposes of s20b 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 instead of the date the services or works are supplied.