Non-payment of service charges and / or ground rents are often one of the main areas for disputes between leaseholders and landlords or their managing agents. We aim to set out why service charges are necessary, the importance of paying on time and the implications of not paying, as well as any rights that the leaseholder may have.
The leaseholder is required by the terms of their lease to pay the service charges and ground rent as determined by their lease in advance of the anticipated year’s expenditure. Any non-payment will result in a breach of the lease.
What are Service Charges?
Landlords (or managing agents on their behalf) collect service charges to recover their costs in providing services to a building. The charge normally covers the cost of services such as general maintenance and repairs, buildings insurance and, if these are provided, heating, lifts, lighting and cleaning shared areas and so on. The charges may also include the costs of management services provided by the landlord or by a professional managing agent, and contributions to a reserve fund.
The lease will set out details of what the landlord can and cannot charge for and the proportion of the charge that you will have to pay. The lease will usually give the dates of the service charge period and how often the payments are due.
The Landlord and Tenant Act 1985 sets out the basic rules for service charges. It defines what is considered a service charge and sets out requirements for making sure costs are reasonable and for landlords to consult leaseholders before entering into any agreement for work or services which would lead to a service charge.
The law protects people who pay service charges and sets the following responsibilities which the landlord must meet;
- Charges must be reasonable. (You can challenge them at the tribunal if you don’t believe they are.)
- The landlord must consult you before starting any work which will cost you more than £250 (qualifying work), or entering into a long-term contract which will cost you more than £100 for any leaseholder in any accounting year (a qualifying long-term agreement).
- Demands for payment must include the landlord’s name and address and be accompanied by a summary of your rights and obligations.
- Service charge funds must be held in trust.
- Landlords must account for all spending during the year by providing a summary of relevant costs if you or the secretary of the recognised tenants’ association asks for this in writing. After the landlord has provided the summary, you or the secretary can inspect the relevant documents.
Administration Charges
Since the Commonhold and Leasehold Reform Act 2002 came into force it has become possible to levy variable administration charges for breaches of a lease, such as late payment, even if the lease does not specify this. Any administration charge the landlord asks for must be reasonable and the landlord must provide a summary of your rights and responsibilities relating to administration charges with the demand. If the summary is not included, you do not have to pay the charge until the landlord issues the demand with the summary.
In some cases, your lease may also allow your landlord to recover legal costs arising as a result of court action or a tribunal decision. These costs may arise as a result of you:
- failing to pay an amount that was due to the landlord; or
- breaking (or allegedly breaking) the terms of the lease.
Leases often allow interest to be charged on unpaid service charges which often encourages payments to be made in a timely manner. A typical lease will specify a late payment interest rate of around 4% above base rate.
Failure to pay
If you fail to pay service charges, ground rent or administration charges which are due, you could face action from your landlord. This could include your landlord applying for a county court judgment, asking your mortgage company to pay the arrears and add these to the amount outstanding on your mortgage and, even taking action to end the lease and repossess the property. By law, your landlord has the right to take this action, but they cannot take back possession of your home without a court order. They must generally start the process of action to take back possession of your home by serving a valid notice of seeking possession under section 146 of the Law of Property Act 1925.
Not all disputes about service charges end up at the tribunal or the county court. The courts and tribunal should be a last resort and leaseholders and landlords should try to settle their issues by agreement and discussion, if possible.
Prior to legal action the letters provided to the defaulting leaseholder must be clear and concise, refer the leaseholder to the availability of legal advice, provide a reasonable time for the leaseholder to respond and state what will happen if the date passes and the debt remains unpaid. If the Civil Procedure Rules (CPR) are not followed then the court could possibly strike out the claim.
Legal action is usually sought by seeking a judgment by the court (CCJ) which may award the monies owed plus fixed costs (for claims under £5,000) and late payment interest to be paid by the defaulting leaseholder. Once a CCJ is granted by the court the landlord’s solicitor has a variety of options to enforce the court’s order.
In most cases if there is a mortgage on the property it is likely that the mortgage provider will be given a further opportunity by the solicitor to protect the mortgagee’s interest and pay on behalf of the leaseholder the full amount owing including the solicitor’s costs, interest, administration charges and, of course, all the arrears of service charges and ground rent.
If payment still remains outstanding following the court’s determination a number of the following enforcement measures are available:
- Warrant of Execution by the courts bailiff to seize goods to the value of the debt;
- Attachment of Earnings Order – where monies are deducted regularly from the debtors salary;
- Charging Order – where the debt is secured against land or shares in which the debtor has an interest;
- Third Party Debt Order, requesting the monies to be paid by a third party who owes money to the debtor (often banks or building societies).
Horizon’s Procedure
Legal action is always a last resort for us but where debt recovery is necessary, we follow a clear and strong procedure explaining why payment of service charges is so crucial to the running of their development.
We follow the below procedure:
- Reminder letter – sent 14 days after the due date, explaining the procedure that will follow if payment is not made.
- Second reminder – sent 21 days after the due date advising when legal action will be initiated 7 days after date of this letter.
- Legal action initiated – sent 28 days after the due date with a £50 late payment fee added to the leaseholder’s account.
At each stage of the request for monies we offer the leaseholder the opportunity to discuss the outstanding monies to see whether a suitable arrangement can be made.
If you have any questions about residential management services, please don’t hesitate to reach out to our team hello@horizonmanagement.co.uk
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- Leasehold Reform (Ground Rent) Act 2022: Update
