Question 1

How to deal with service charge arrears?

Accepted Answer

We have a resident member who has stopped paying his monthly banker’s order for his service charge and has gone into arrears. We would like to help him with any problems which may be causing default, but he no longer answers our letters. We feel that we may well need to take legal advice, but would be glad of any suggestion you can make on strategies and on what is the legal position? The FPRA replies: Whilst one must have sympathy for anyone encountering financial difficulties, non-payment of service charges to a Residents’ Management Company may, at the end of the day, have the result that those obligations fall on other leaseholders. I think the first point you should ascertain is whether the leaseholder in default has a mortgage or mortgages. You can find this out from the Land Registry. If more than one mortgage is registered it may well indicate that the leaseholder’s financial difficulties are not recent and also that they are more serious. It will do no harm to write to the first mortgage lender, asking them to pay the arrears. They may be prepared to do so, as, if you should seek to enforce arrears of service charges by going down the forfeiture route, it will bring the lease to an end and the mortgage lender will simply lose its security. They will wish to avoid this if at all possible, even if it means incurring further expenditure which they may possible not get back (if, for example the borrower is, or may soon be, in “negative equity”. Most mortgage deeds will give the lender the specific right to pay rent and service charges on the borrower’s behalf, and to add the money to the mortgage-debt. At one time many mortgage-lenders would have paid out in these circumstances almost as a matter of course, but there have been cases where they have paid out, only for them to find themselves in a difficult situation because the borrower claims that the service charges were not owing and that he wished to dispute them. For this reason you may well find that mortgage-lenders are prepared to pay arrears of service charge only if the landlord first applies to the Leasehold Valuation Tribunal for a ruling that the service charges have been properly incurred and are payable. You would make the leaseholder in default, and any others in default, respondents to any such application. If the application was not opposed then you should find that the case would not take too long. If you have obtained a ruling that the charges are owing then you should find that most mortgage-lenders will be prepared to pay them. If the first mortgage-lender is not prepared to pay the arrears, it is worth at least writing to any subsequent mortgage-lenders (though, the lower down the queue they are, the less likely it is that they have an incentive to pay). But if your leaseholder’s mortgage-lenders all say that they are not prepared to pay the arrears, even if confirmed by the LVT, there is likely to be no point in going down the LVT route. You would then have to enforce the arrears in some other way. You could take proceedings as a small claim in the County Court with a view to getting judgement for the sum owing. The problem then is that you would need to enforce the judgement. Bearing in mind the second-hand value of domestic contents, putting in the bailiffs to seize them may well not produce sufficient, unless someone has a reasonably saleable car. Seizing a bank or other savings account is even less likely to work, as those who are unable to pay service charges will rarely have savings stashed away. An attachment of earnings order may be a better bet, but they are not available if someone is self-employed or is relying on a State pension or other social security benefits (private pensions, including public sector pensions, can, however, be attached). You would also have the problem that, if the leaseholder should go bankrupt, you would be likely to get only a proportion of what was owing in any bankruptcy (even if the debt had been converted into a judgement). For these reasons I suspect that you would have to “take the bull by the horns” and, once you had obtained judgement for the sum owing, your next step ought to be to get a solicitor to serve what is known as a Notice under s.146 of the Law of Property Act 1925 on the leaseholder, and then get the solicitor to follow this up with proceedings to forfeit the lease. This is in some sense a rather “heavy” procedure, but it is likely to put you in a better position to recover your arrears if the leaseholder does end up going bankrupt. The interrelationship between forfeiture and insolvency is rather complicated and this letter is not the place in which to go into detail on it, but, if there are priorities of claim to sort out, you are likely to be in a stronger position if you are forfeiting the lease than if you are trying to enforce a money judgement. Legal note Section 146 Notices (Forfeiture Notices) can only be issued where the amount owed exceeds £350 or if below this limit has been owed for at least 3 years.

Question 2

How to deal with service charge arrears?

Accepted Answer

We have a resident member who has stopped paying his monthly banker’s order for his service charge and has gone into arrears. We would like to help him with any problems which may be causing default, but he no longer answers our letters. We feel that we may well need to take legal advice, but would be glad of any suggestion you can make on strategies and on what is the legal position? The FPRA replies: Whilst one must have sympathy for anyone encountering financial difficulties, non-payment of service charges to a Residents’ Management Company may, at the end of the day, have the result that those obligations fall on other leaseholders. I think the first point you should ascertain is whether the leaseholder in default has a mortgage or mortgages. You can find this out from the Land Registry. If more than one mortgage is registered it may well indicate that the leaseholder’s financial difficulties are not recent and also that they are more serious. It will do no harm to write to the first mortgage lender, asking them to pay the arrears. They may be prepared to do so, as, if you should seek to enforce arrears of service charges by going down the forfeiture route, it will bring the lease to an end and the mortgage lender will simply lose its security. They will wish to avoid this if at all possible, even if it means incurring further expenditure which they may possible not get back (if, for example the borrower is, or may soon be, in “negative equity”. Most mortgage deeds will give the lender the specific right to pay rent and service charges on the borrower’s behalf, and to add the money to the mortgage-debt. At one time many mortgage-lenders would have paid out in these circumstances almost as a matter of course, but there have been cases where they have paid out, only for them to find themselves in a difficult situation because the borrower claims that the service charges were not owing and that he wished to dispute them. For this reason you may well find that mortgage-lenders are prepared to pay arrears of service charge only if the landlord first applies to the Leasehold Valuation Tribunal for a ruling that the service charges have been properly incurred and are payable. You would make the leaseholder in default, and any others in default, respondents to any such application. If the application was not opposed then you should find that the case would not take too long. If you have obtained a ruling that the charges are owing then you should find that most mortgage-lenders will be prepared to pay them. If the first mortgage-lender is not prepared to pay the arrears, it is worth at least writing to any subsequent mortgage-lenders (though, the lower down the queue they are, the less likely it is that they have an incentive to pay). But if your leaseholder’s mortgage-lenders all say that they are not prepared to pay the arrears, even if confirmed by the LVT, there is likely to be no point in going down the LVT route. You would then have to enforce the arrears in some other way. You could take proceedings as a small claim in the County Court with a view to getting judgement for the sum owing. The problem then is that you would need to enforce the judgement. Bearing in mind the second-hand value of domestic contents, putting in the bailiffs to seize them may well not produce sufficient, unless someone has a reasonably saleable car. Seizing a bank or other savings account is even less likely to work, as those who are unable to pay service charges will rarely have savings stashed away. An attachment of earnings order may be a better bet, but they are not available if someone is self-employed or is relying on a State pension or other social security benefits (private pensions, including public sector pensions, can, however, be attached). You would also have the problem that, if the leaseholder should go bankrupt, you would be likely to get only a proportion of what was owing in any bankruptcy (even if the debt had been converted into a judgement). For these reasons I suspect that you would have to “take the bull by the horns” and, once you had obtained judgement for the sum owing, your next step ought to be to get a solicitor to serve what is known as a Notice under s.146 of the Law of Property Act 1925 on the leaseholder, and then get the solicitor to follow this up with proceedings to forfeit the lease. This is in some sense a rather “heavy” procedure, but it is likely to put you in a better position to recover your arrears if the leaseholder does end up going bankrupt. The interrelationship between forfeiture and insolvency is rather complicated and this letter is not the place in which to go into detail on it, but, if there are priorities of claim to sort out, you are likely to be in a stronger position if you are forfeiting the lease than if you are trying to enforce a money judgement. Legal note Section 146 Notices (Forfeiture Notices) can only be issued where the amount owed exceeds £350 or if below this limit has been owed for at least 3 years.

How to deal with service charge arrears?

Search

Articles Archive