Service Charges: Can’t Pay or Won’t Pay?
It is common knowledge that leaseholders who don’t pay their service charges are in breach of their lease but what is not focused on so much is why this can occur. There are a number of reasons such as redundancy, being too ill to work, suddenly finding themselves on a low/fixed income or with no savings to fall back on.
Such situations can happen to anyone and just as a mortgage or a credit card is a contract, the lease is also a contract and it is important that either the freeholder or managing agent is advised as soon as possible that there is a problem. Otherwise demands will continue to be sent (which usually contain a threat of legal action), they will likely add their own administration charges, (if the lease allows it) and, as a result, worsen the whole situation.
Other reasons for leaseholders falling into arrears could be that:
- A leaseholder has died and the estate is being handled by family members;
- There are 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) fail to serve the required notices stated by the lease during the conveyancing process.
It is however a different matter when leaseholders feel that their charges are unreasonable and mount a challenge. If this is the case the Leasehold Advisory Service website advises that leaseholders should ‘continue to pay their service charges’ whilst at the same time making it clear that they are paid ‘without prejudice’ to their right to challenge the charge later. This is not a legal requirement but it does mean that the service charge account does not become depleted.
But what happens if leaseholders don’t offer any reason for not paying and simply stop? This happened on our block in 2017 and it’s been an absolute nightmare!
Two leaseholders, a husband and wife (who also operate as landlords), had both owned their flats for 7 years, but they decided to stop paying. They let the in-house collection processs of our managing agent become exhausted, and refused to respond to any demands, didn’t contact either our RMC or our managing agent with their concerns, ignored the Letter Before Action sent by our company solicitor and only when both claims were filed in the central court money claims centre (small claims track (CPR Part 27). did they challenge the charges by defending them. This resulted in the claims being allocated by that court to the two separate courts of Central London and Clerkenwell and Shoreditch. Both courts then referred the claims to the FTT where they were jointly heard.
THE FTT PROCESS BEGINS
On being referred to the FTT, the first thing it does is to a) try and clarify the issues and b) offer a mediation service. We had not sought mediation previously because the husband was impossible to deal with and we never had any contact with his wife. He was however an appalling landlord and so we had a good idea as to what the outcome of any mediation would be. Nevertheless, as the courts like to see that mediation has been attempted, we accepted their offer.
The process involved us being placed in room and the respondent in another (the wife did not atttend) with the mediator moving between the rooms with questions and answers. Despite our making one or two concessions at this stage there were none from him. So, as we knew it would, mediation failed.
In complex litigation the court may hold what is known as a Pre-Trial Review, a hearing which is usually fixed to take place up to ten weeks before the date listed for trial. It’s purpose is to:
- Check that the parties have complied with all previous court orders and directions (the latter of which are the conduct of the case)
- Give directions for the conduct of the trial;
- Fix a trial timetable if this has not already been fixed;
- Endeavor to secure that the parties make all such admissions and agreements as should reasonably be made by them in relation to the proceedings;
- Record in any order made at the pre-trial review such admission or agreement or any refusal to make such admission or agreement.
The next step is for the parties to submit their papers to the FTT which are are known as ‘bundles’ and the Tribunal may invite both parties to agree on what their respective bundles should contain. Bundles must be submitted on time because failure to do so means that the Tribunal cannot merge the documents into a single bundle. This can lead not only to an increase in the amount of time spent referring to two sets of page numbers but there is a risk that one bundle may inadvertently be referred more than the other.
If a representative (whether legally qualified or not) is appointed by a party to represent them in the proceedings they are subject to written notice of appointment which means that their name and address are given to the Tribunal and the other parties. Any expert evidence cannot be introduced without the Tribunal’s consent and must be in the form of a written report provided to the Tribunal and each other’s parties a) at least 7 days before the date of the oral hearing or b) the date when the issue dealt with by the expert’s report will be decided without a hearing. In cases of a technical nature the rules mean that it is the duty of an expert to help the Tribunal on matters within their expertise so they are usually assisted by expert evidence from a valuer or experienced property manager. This duty overrides any obligation to whoever instructs or pays the expert.
After getting a hearing date and ensuring our bundle was submitted on time, the other side did not do the same and the hearing had to be re-scheduled with another date set for a couple of months later.
Where a hearing is held, the applicant will pay a hearing fee and normally each party will pay their own costs. The proceedings themselves are semi-formal with neither side being required to be represented by a barrister, solicitor or valuer. If parties decide to represent themselves then they must present their case, (including arguments and evidence), clearly, concisely and concern only the matter in dispute.
The liability of a service charge will turn on the construction (interpretation) of the lease, and how all the relevant clauses interact with each other. The proper approach to the interpretation of any contractual provisions (including those of service charges) is the same in every case because leases are rarely identical, both in language and circumstance. The meaning of the covenants (promises) which both parties enter into are required to be crystal clear and leave no room for doubt. If the meaning cannot be established then it cannot be enforced. Any party that wants to enforce a covenant has to establish that it is contained within the lease and if it is not clear then it will be the construction of the language used which will determine the outcome.
Service Charge Mechanism
Modern case law has determined that in some situations service charge demands may well be payable where the service charge mechanism has not been strictly followed and that non-compliance has arisen as a consequence of an established course of dealings at the building between landlord and leaseholders. For example,the recovery clauses may have been interpreted from a business perspective, rather than being viewed from a legal and technical angle. Such an approach does allow for some deviation from the strict terms of the lease as long as leaseholders can understand how the charge has arisen and what their liability is. The rationale behind this is that leaseholders have had the opportunity to read the lease and understand its provisions but if the freeholder deviates significantly from the terms, the leaseholder liability becomes unenforceable. Success of that argument at any hearing will depend on a) any argument raised by the defendant and any prejudice it has caused them and b) the particular district judge hearing the matter. In a situation where the leaseholder has historically made payment it is arguable that it is potentially unfair to later dispute liability created on that basis.
Estoppel by Convention
This deviation from the lease applied to us because we were collecting service charges in advance rather than in arrears. It was a decision taken by our managing agent (when we finally secured one) as we inherited no funding from the previous (absent) freeholder. We desperately needed some money up front to start repairing the roof and water tanks that were in such a state as to be causing major water ingress into the flats immediately beneath, including ours. Our Barrister was able to successfully argue that the departure from the lease mechanism had created an ‘estoppel by convention’, a legal principle that prevents a party from arguing a point because of it’s previous conduct, allegation, or denial.
There are two general types of estoppel: equitable and legal and whilst the legal concept of estoppel does not arise very often, when it does it is because parties to a contract act on an assumed state of the law or the facts. Whilst the contract does not have to be binding on the assumed matters, it is the actions/conduct of the parties that could amount to a “convention”. It is relevant to the non-compliance of lease terms whereby over a number of years parties to a lease have overridden its prescribed terms and where applicable it can potentially be crucial to the outcome of a claim.
Recovering Legal Fees
In the late 1970’s it was standard practice for the leaseholder covenant (promise) to pay service charges for services, repairs, maintenance, improvements, insurance or the landlords’ costs of management, to be enforced by the freeholder issuing forfeiture proceedings through the County Court (costing the leaseholder both the lease and the property). Even if the leaseholder paid the amount owed and avoided the use of forfeiture, they would also be expected to pay the landlords costs on an indemnity basis. This meant the Court would give the benefit of any doubt as to a) whether the costs were reasonably incurred or b) whether the costs were reasonable in amount, in favour of the receiving party. Whilst it was not expected that the landlord would incur any legal costs, a ‘sweeper clause’ (a ‘catch all provision) was originally interpreted on the basis that there would be no need to recover such costs through the service charge.
Today this is no longer standard practice and forfeiture is now far more difficult to deploy due to legislation and modern sweeper clauses are designed to bring charges which, whilst are not actually specified, are things that freeholder ‘might’ want to recover from time to time through the service charge. As with any contractual provision, whether such clauses are actually able to act as a ‘catch-all’ depends entirely upon the drafting.
Newer leases (i.e. those written after 1996) often include a specific obligation for the leaseholder to pay the landlord’s legal or professional costs incurred in connection with either recovering (or trying to recover) service charge arrears, or in connection with a breach of covenant by the leaseholder. Such costs are classed as administration charges as they are neither ground rent or service charges. Providing that recovery is ‘reasonable’ they can recovered directly a) from the defaulting person or, b) if the legal costs incurred are included in the list of services provided by the freeholder (or the managing agents) they can be recouped as a service charge and apportioned across all leaseholders.
Our old leases however don’t contain either of the above clauses and have not been able to reflect the considerable number of legislative changes that have been implemented since they were written. Ours 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 of the Law of Property Act 1925 (restrictions on and relief against forfeiture of leases).
An obligation is however imposed on all leaseholders (under s146(3) of the Act) 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 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’. This obligation is regardless of whether the leases allow the recovery of legal costs from an individual or not.
Leaseholders can also limit the landlord costs under s20c of the Landlord and Tenant Act 1985 (limitation of service charges: cost of proceedings) by preventing the freeholder from putting the costs of any legal proceedings through the service charges even if the lease allows it.
It is however important to note that the payment of costs by leaseholders are limited only in certain circumstances. They can, in fact, be unlimited, and can be awarded by a superior court with the Tribunal Procedure (First Tier Tribunal)(Property Chamber) Rules 2013 s13(1) reading: ‘the Tribunal may make an order in respect of costs a) under s29(4) of the Tribunal, Courts and Enforcement Act 2007 (wasted costs) and the costs incurred in applying for such costs or b) if a person has acted unreasonably in bringing, defending or conducting proceedings.
After hearing both sides of the case, the Tribunal reviewed the evidence presented and made a determination that it considered to be just and equitable on:
- The basis of the evidence and;
- The judgment and experience of the Tribunal members and if the service charge is payable;
a) Who pays it;
b) Who receives it;
c) The amount;
d) The date payable;
e) How it’s paid.
Their decision was not given to us verbally at the hearing but their written decision came in a couple of weeks or so. It gave a clear breakdown of each section of the case and why it decided for or against us (and the dcisions were mostly in our favour).
Permission To Appeal
Application to appeal to the Upper Tribunal Lands Chamber must be made first to the FTT for them to grant permission. This applies to both parties. The Lands Chamber will not accept an appeal without such permission and they must receive it within 14 days of the parties being sent the decision of the FTT. If permission is refused, only then can an application for permission to appeal be made to the Lands Chamber. Additionally (and with the agreement of the Upper Tribunal), complex cases which could have the potential to be appealed on points of law could be referred to the next level with no substantive hearing before the FTT, a move designed to save time.
A decision of the Upper Tribunal in the case of Cain v Islington Borough Council  UKUT 542 (LC) as to whether service charges were reasonable, (including those dating from twelve years ago) summarised that a tribunal could infer from a series of payments made without protest that the tenant had agreed that the amount claimed was the amount properly payable. The longer the period over which payments had been made, the more readily a tribunal would find that the tenant agreed that which had been demanded. The tenant in this case was barred by s.27a(4) of the Landlord and Tenant Act 1985 (liability to pay service charges: jurisdiction) from proceeding with the application.
It is my firm belief that the reason the leaseholders are refusing to pay is to make the RMC bankrupt. The reason I hold this view is that not long after the flats were purchased the landlord went round knocking on the doors of individual flats asking if they were satisifed with management (we had secured RTM at the time) and if not, he could do it better and cheaper. I have had to become involved in the management of his rental properties on a number of occasions (at the request of various tenants) to the extent of having to involve the council. He has not treated the legal process with any respect because not only did he and his solicitors ignore Tribunal directions, he was actually debarred from the hearing! Not to be deterred he actually turned up on the day and asked for an adjournment as he claimed to have no knowledge of the debarrment and had not been in contact with his brief as both parties had been in hospital! After having to sit and listen this absolute rubbish he did not get his adjournment request granted but he was allowed to stay as the hearing was held in open court and he had the right to sit in as a member of the public! I cannot tell you how angry I was at this but there was nothing we could do. Security were called to sit in on the hearing and even at the end, he deliberately tried to speak to the panel by hanging around and making our Barrister and solicitor wait until he left.
So where are we now?
Despite the FTT judgements made largely in our favour, the service charge account has yet to see a penny! These two leaseholders remain in arrears and further arrears have subsequently been accrued. This means that we not only now have to adhere to the Debt Pre-action Protocol which was introduced on 1st October 2017, but we also have to look at enforcement measures, which will cost us yet more money!!
We now have the necessary paperwork from Clerkenwell and Shoreditch to enforce the tribunal award against one leaseholder, known as an Order of Recovery, but our solicitor has advised us that he is having a lot of difficulty getting a similar order out of the Central London County Court. After phoning them he was advised that the issue is being caused by the fact they outsource this area of their business which takes time and allows for errors in the process. Until we get that second Order of Recovery we cannot send in the bailiffs to their home address which is the enforcement measure that our solicitor advises we take, based on the behaviour of the leaseholders so far. This will enable the removal of anything that can be sold to realise the debt.
Note: This article will be updated as the situation progresses (providing we can afford it!).