Service Charge Demands
It is usually the managing agent who demands and collects the service charges and the statutory codes relating to service charge recovery are s21b of the Landlord and Tenant Act 1985 (notice to accompany demands for service charges) (amended by s153 of the Commonhold and Leasehold Reform Act), s47 of the Landlord and Tenant Act 1987 (landlords name and address to be contained in demands for rent) and s48 of the Landlord and Tenant Act 1987 (notification by landlord of address for services of notice).
The following example is the service charge demands/collections 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.
This is exactly the same as the first stage if there has been no response from the mortgage company or if they have declined to assist with payment. If they have agreed to assist then they usually request between 7 –28 days for their borrower to respond.
At this stage the cycle of chasing is slowed to accommodate this request.
A second letter is sent to the mortgage company – if the agent or the mortgagor don’t hear from the borrower the agent contacts the mortgage provider again in writing to which they usually return a cheque;
Payment received (if no payment is received at this stage then legal action will commence).
DEBT PRE-ACTION PROTOCOL
The Debt Pre-Action Protocol came into effect on 1st October 2017 and is similar to the basic criteria under the Civil Procedure Rules (CPR) Practice Direction Pre-action Conduct concerning debt recovery 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.
The full protocol can be found here.
EIGHTEEN MONTH RULE
If leaseholders received a demand for payment within 18 months of a cost being incurred which happens either on a) the date the landlord receives a demand to pay the relevant cost, b) the landlord pays it, whichever happens first or c)
the leaseholders receive in writing that a cost has been incurred, the amount and they will be required to pay that cost as a service charge at a later date.
If freeholders fail to do this then they will not be able to recover the charges.
However, an estimated service charge liability in response to which payment is not mandatory, does not count as a demand for payment. Nor does a service charge invoice which does not meet the contractual requirements of a lease. A request for a contribution to a reserve fund is also unlikely to count as a demand for payment of a service charge.
If for any reason a landlord can’t send out a demand for payment within 18 months of a cost being incurred they can send a s20B Notice instead of a demand for payment. This is a special letter which if prepared properly and sent within the 18 months is the only time a landlord can demand payment later than 18 months.
In order to meet the requirements of 20B the notice must:
- List what costs have actually been incurred by the landlord, at the time of writing, in relation to the leaseholder’s building or estate.
- List only the relevant costs. A notice which includes non-chargeable costs, such as those incurred in respect of a building or estate to which a leaseholder is not required to contribute, does not meet the requirements of section 20B.
- Include all the costs the landlords wishes to charge for in the future, including any management fee or relevant VAT. If such costs are not listed then the notice does not meet the requirements of section 20B in respect of those costs.
- The notice must make clear to the leaseholder that the landlord intends to charge the leaseholder a share of those costs as service charge under the terms of their lease.
Whilst the Act says ‘eighteen months’ this is from the date the cost was incurred, so it is advisable that notification is sent about a deficit within six months of the year end, i.e. eighteen months from the first day of the accounting year.