Demands and Arrears
During the process of serving service charge demands and chasing reminder letters (with accompanying notices relating to tenants’ rights and obligations under s153 of the Commonhold and Leasehold Reform Act (which amends that of s21a of the Landlord and Tenant Act 1985) and s158 of the 2002 Act, managing agents and RMCs should ensure that any slow payers are penalised with late payment administration charges when appropriate. The legislation merely states that such charges should be reasonable.
Note This can be done only if the lease allows it. Managing agents may say that such charges are part of their management fees but the lease remains the overriding document.
If a demand for service charge or administration charges is not accompanied by a summary of the rights and obligations of the leaseholder 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 came into effect on 1st October 2007.
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.
So what’s the process for demanding service charges?
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 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.
There are many reasons why leaseholders can find themselves in this position, resulting in a breach of their lease. There is however a distinct difference between those who can’t pay and those who won’t. 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 means that this is not a deliberate lease breach. It is therefore important that the freehold RMC or the managing agent is advised of any difficulties as soon as possible, particularly if the situation is likely to be ongoing for longer than first thought. Unless they are advised, they will continue to send out demands (which usually contain a threat of legal action) and add administration charges, without having the slightest idea what the lessee is having to deal with and as a result inadvertently worsen their situation.
In fact this is no different to a radical change in circumstances when a mortgage or a credit card is taken out as genuinely honest people enter into them in good faith.
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 incorrectly addressed;
- New leaseholders (or their solicitors) failing to serve the required notices stated by the lease during the conveyancing process