Service Charges: Can’t Pay or Won’t Pay?
When leaseholders fall behind with their service charge payments it can be for any number of reasons such as;
- Being too ill to work;
- Suddenly finding themselves on a low/fixed income;
- No savings to fall back on;
- 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.
Leaseholders also have the right to mount a challenge if they feel their service charges are’unreasonable’ and mount a challenge, with the Leasehold Advisory Service website advising 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 and services to the block are maintained.
What happened on our block in 2017 however was an absolute nightmare which is still ongoing!
REFUSING TO PAY!
Two leaseholders, a husband and wife (who also operate as landlords), had both owned their flats for 7 years when they let the in-house collection processs of our managing agent become exhausted by refusing to respond to any demands. They didn’t contact either our RMC freeholder or our managing agent with their concerns, and ignored the Letter Before Action sent by our company solicitor. Only when both claims were filed in the central court money claims centre (small claims track (CPR Part 27) did they mount a challenge 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 the first thing that happens is that the Tribunal tries to a) 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. 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 believed 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 to 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 have paid 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.
Service Charge Liability
The liability of the service charge demands lay at the heart of the hearing and will turn on a) the construction (interpretation) of the lease, and b) 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.
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.
This was demonstrated in the 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) where they 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.
Estoppel by Convention
We had deviated from the lease in terms of collecting service charges in advance rather than in arrears. It was a decision taken by our (then) managing agent some years previously as our freeholder was not only deemed ‘absent’ but because we inherited absolutely no funding, money was desperately needed up front to start repairs to the buildind caused by decades of neglect. 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.
Legal and Professional Costs
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 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 but 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.
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 decisions 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.
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 for the latter arreas we now have to comply with the Debt Pre-action Protocol which was introduced on 1st October 2017 which is thought to make the service charge collection process even more long winded!
So why do we think this happened?
We believe that the leaseholder(s) is acting out of pure spite with the intent to make the RMC bankrupt. Why? Because we have had to become involved in the management of both properties on a number of occasions at the request of his tenants, even to the extent of involving the council. We were advised by previous tenants that he had knocked on their doors asking if they were satisfied with the level of management (we had secured RTM at the time) and if not, he could do it better and cheaper.
Even when it came to the requirements of the FTT he treated them with the same level of distain because not only did he and his solicitor ignore the 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 that could be done. Security were called to sit in on the hearing and even at the end, he deliberately tried to speak to the Tribunal panel by hanging around and making our Barrister and solicitor wait until he left.
So where are we now?
We now have the necessary paperwork from both Clerkenwell and Shoreditch and the Central London County Court to enforce the tribunal award against both leaseholders, known as an Order of Recovery. It did take a bit of time to get the latter because they outsource this area of their business which takes time and allows for errors in the process.
It looks as if sending in the bailiffs is going to be the next step in terms of enforcement but we are due to discuss this with our company solicitor.
Note: This article will be updated as the situation progresses (providing we can still afford it!).