Demands, Arrears and the Debt Pre-Action Protocol
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 but before we do, why do leaseholders fall into arrears?
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
THE DEBT PRE-ACTION PROTOCOL
Before any legal action is taken to recover arrears, the Debt-Pre-Action Protocol must be adhered to. It came into effect on 1st October 2017 but it has not been specifically written for leaseholders in arrears, rather they have been included within it. The full protocol can be found here.
There are distinct similarities between this and the basic criteria under the Civil Procedure Rules (CPR) Practice Direction Pre-action Conduct but the protocol has expanded on this with the aim being to encourage early communication between the parties and avoid court proceedings either by a) agreeing a debt repayment plan or b) referring the matter to some form of Alternative Dispute Resolution.
A Letter of Claim is now required to be sent to the defaulting leaseholder containing the following information:
- The name of the lessee;
- The debt amount;
- Period of claim;
- Accruing interest (if any);
- A copy of the most recent statement of account;
- Details of any agreements made with the lessee in relation to previously agreed payment plans and why these are no longer acceptable;
- The lessee’s correspondence and email addresses;
- Details of how the debt can be paid;
- The address to be used for the completed Reply Form.
- A copy of the Information Sheet;
- The Reply Form;
- A financial statement form, i.e. the Income and Expenditure Form enclosed with the Letter of Claim.
So what has changed?
Lessees now have 30 days to respond to the Letter of Claim before court proceedings are issued. Previously 14 days was considered acceptable from the first Letter Before Action sent by a solicitor and a further 14 days should a second letter need to be sent. The lessee will also be allowed more time if they want to take their own independent legal advice. If the lessee requires time to repay the debt, both parties should aim to agree either agree to an instalment repayment plan, based on the lessee’s income and expenditure but if the landlord cannot agree or is not ready to accept a lessee’s proposed repayment plan, it must explain reasons for its refusal in writing.
If the parties agree a debt repayment plan, and the lessee starts but then stops complying with it, before issuing court proceedings, the landlord must send an updated Letter of Claim and comply with the Debt Protocol all over again with the lessee having another 30 days to respond to the second Letter of Claim. Previously 14 days was considered enough.
If a lessee has sent a Reply Form to the landlord but no debt repayment plan was agreed between the parties, then the landlord should give the lessee at least 14 days’ notice of its intention to issue court proceedings. Non-compliance with the Debt Protocol may be taken into account by the court when giving directions for the management of the proceedings and/or making orders for costs.