Handling the Non-Payment of Service Charges

Several issues can become grounds for contention between landlords and leaseholders – particularly regarding service charges and ground rents. When a tenant moves into a leasehold property, such as a block of flats, they will be required to pay a lease charge to the freeholder of the building. This is effectively the rent due to the owner of the property. In addition, some blocks will also charge service and maintenance fees. But what are these fees and what happens when a tenant refuses to pay?

Service Charges… what they are and what they cover

Service charges (or estate charges when referring to houses on a managed development) are essential for the effective management of any block or development. These charges can cover repairs, general maintenance, and building development. For example, service charges – which the landlord or the Managing Agent collects on their behalf – contribute to keeping communal areas and services such as lifts serviceable to tenants. Service charges may also help to pay for the costs of managing the building, either for the landlord directly or for the development or block’s Managing Agent.

Obligations of the Freeholder or Managing Agent

When a leaseholder moves into their flat or apartment, any service charges’ details should be clearly stated in their lease agreement. The lease will also set out what the landlord can and cannot charge for and inform the tenant when payments are due.

In some cases, the need to carry out repairs and development outside general maintenance may lead to additional service charges for residents. No matter the reason for service charges, landlords or Managing Agents are required to:

Consult tenants before starting any work: The landlord is obliged to consult tenants before starting any work that will cost tenants more than £250 (qualifying work) or entering into a long-term contract that will cost a leaseholder more than £100 in any accounting year (a long-term qualifying agreement). This requirement, among others, is set out in the Landlord and Tenant Act of 1985.

Keep a summary of relevant costs: The landlord or Managing Agent will also be required to account for all spending throughout the year in a summary of relevant costs. This document should be made available in writing if the building’s Resident Management Company or other recognised tenants’ association requests it.

Hold and request services charges appropriately: Service charges are required to be held in trust, and requests for payment must include the landlord’s name and address and be accompanied by a summary of the tenant’s rights and obligations. This is why Horizon holds at least one client account for each site under management rather than a standard business bank account.

Understanding Administration Charges

Since the introduction of the Commonhold and Leasehold Reform Act in 2002, landlords are able to levy variable administration charges for breaches of a lease. For example, a leaseholder may be charged an administration fee for late payment, even if this is not set out in the lease. Administration charges can also be applied to other breaches of the lease. In some cases, the landlord may also be entitled to recover legal costs arising from a court action or tribunal decision relating to such breaches. At Horizon we are very keen to talk to leaseholders before their arrears escalate and we can arrange payment plans in many instances to assist the leaseholder with their obligated payments. We fully appreciate circumstances change and we look to seek dialogue with leaseholders to support them before the issue escalates. We do not like to add late payment administration charges to a leaseholder’s account but will do so when other avenues are exhausted.

These administration charges should be reasonable and, like service charges, demands for payment must include a summary of the tenant’s rights and obligations in relation to the fees. If this summary is not provided, then the tenant can refuse to pay the charge until it is provided. A leaseholder can also challenge an administration charge if they are unfair; however, tenants cannot challenge administration charges, if:

They have already admitted responsibility for payment;
The charge will be/has been referred to arbitration following a dispute;
The charge has already been decided on by a court or tribunal

While administration charges won’t always be included in the lease agreement, leases often allow charges to be incurred on unpaid service charges. Typically, a late payment fee is specified at an interest rate of around 4% of the base rate. The chance of incurring a late payment fee is often enough to encourage tenants to pay any relevant charges in a timely manner – but this isn’t always the case.

What happens if a leaseholder doesn’t pay?

Leaseholders who fail to pay any relevant ground rent, service charges, or administration charges could face legal action from the freeholder, however, landlords and leaseholders should first try to settle their dispute outside through discussion and negotiation. If this does not work, a landlord may begin one of the following actions:

Taking the case to County Court or first tier tribunal;

Asking the leaseholder’s mortgage provider to pay the arrears and add the amount to the amount outstanding on the mortgage;

Taking action to end the lease and repossess the property – (this cannot be done without a court order and will require them to serve a valid notice of seeking possession under section 146 of the Law of Property Act 1925)

Prior to any legal action being begun, the freeholder should ensure that letters sent to the leaseholder are clear in their meaning and refer the leaseholder in question to the availability of legal advice. Landlords should also provide tenants with a reasonable response time and inform them of action that is to be taken if the debt remains unpaid after this date passes. If these obligations (known as Civil Procedure Rules) are not followed, then the court may strike out the claim.

Seeking a Judgement in Court

Most cases of legal action for non-payment are settled by seeking a judgement by the court (CCJ). If the landlord wins the court order, the court decision may award the monies owed, in addition to fixed costs (for claims under £5,000) and late payment interest to the landlord. Once this decision is reached, the landlord has various options for enforcing the court order, including once again requesting payment from the leaseholder’s mortgage provider.

If, however, payment still remains outstanding, a number of other enforcement measures may be considered:

Warrant of Execution by a bailiff: the court’s bailiffs may be tasked to seize goods to the value of the amount owed to the landlord;

Attachment of Earnings Order: money is regularly deducted from the debtor’s earnings;

Charging Order: securing the debt against land or shares in which the debtor has an interest;

Third Party Debt Order: Requesting payment from a third party who owes money to the debtor (usually a bank or building society).

Most people – landlords, managing agents, and leaseholders alike – will do everything in their power to avoid legal action for non-payment of service charges. That’s why, at Horizon Management, we have set out a clear procedure that has been designed to inform leaseholders of the importance of service charges in order to provide funds to manage a block effectively and avoid the need for legal action to be taken, which is a route no one wants to resort to.

Horizon’s procedure for non-payment of service charges is as follows:

A Reminder Letter is sent: If we do not receive payment on behalf of the landlord after 14 days past the due date, we send a letter to the tenant in question to explain the next steps that will be taken if payment is not made.

Second reminder sent: If, after another 7 days past the due date (21 days total) payment is still not received, we send a second reminder letter to advise the tenant that legal action will be initiated 7 days after the date of this letter.

Legal action initiated: If payment is still not made, the tenant will be made aware of the initiation of legal action, and a £50 late payment fee will be added to the leaseholder’s account.

At each stage of this procedure, the leaseholder will also be offered the opportunity to discuss the outstanding amount owed with the aim of coming to a suitable arrangement for both parties concerned.

At Horizon, we aim to do everything in our power to handle service and administration charges in an efficient and considerate manner to give our clients peace of mind and maintain our high standards of Block Management service.