Question 1

Taking legal action against service charge non-payers

Accepted Answer

Our Residents’ Management Company is about to start legal proceedings against a house-owner who hasn’t paid any maintenance for more than 3 years – they have only made one payment since moving in and are currently renting out their house. The company owns the freehold with home-owners each having a share. The complex consists of flats and houses, with the flat-owners owning a leasehold and the house-owners owning a freehold. The debtors have been sent regular requests for payments and at least one solicitor’s letter, all of which were ignored. Our solicitor has suggested a small claim and before Christmas I sent a recorded delivery letter to the 2 owners requesting the amount outstanding and giving 30 days to pay before legal action would begin. One of the owners spoke to the company secretary after receiving the letter and said he would make payment soon but no payment or letter has been received and the 30 days has now expired. Before I start the procedure (I was going to go through Money Claim online) is there any useful wording or examples of how I should complete the documentation? I am also hoping to claim interest and compensation, if possible, as the debt alone is now over £1500. 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, before starting legal proceedings, 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. If there is a mortgage registered against the flat, 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 either gets judgment for the arrears from the County Court, or else applies to the Leasehold Valuation Tribunal for a ruling that the service charges have been properly incurred and are payable. If you think that this leaseholder, or any other leaseholders in arrears and against whom you may have to take similar action, are likely to contest the amount payable in some way, I would recommend going down the LVT route. 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 it seems that there is no dispute, it is just that they can’t or won’t pay, then you would do better to take proceedings in the County Court for a money judgment. If you have obtained either a money judgment from the County Court, or a ruling from the LVT 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 not have a choice of avenues, and you would have to take proceedings as a small claim in the County Court with a view to getting judgment for the sum owing. I have not seen a copy of your lease so I am not clear whether it stipulates that interest should be payable on unpaid arrears of service charge. If it does, then you can include in the Claim Form the rate of interest set by the lease. If the interest is not set out in the lease, then you would have to ask in your Claim Form for interest, calculated in line with the statutory rate. The Court Office should be able to clarify what this currently is. You are not generally entitled in a monetary claim to include compensation for your time and trouble, or even for expenses incurred in borrowing money to cover unpaid arrears. This is a cogent reason for having a provision in the lease that interest should be chargeable on unpaid ground rent and service charges. Indeed, the lack of this now constitutes a good reason to apply to the LVT to have all the leases varied. If you do get judgment in the County Court, then, as previously stated, you may find that, if you actually have a county court judgment against a leaseholder, any mortgage-lender may be more prepared to pay the arrears. If they will not, then you still have to enforce the judgment in some way. Judgments do not usually produce payment as if by magic. Bearing in mind the limited secondhand 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 judgment). With property that is currently being rented out, you would in theory have the rather unusual remedy of applying to the Court for a receiver to be appointed i.e. for an agent to be appointed to collect the rent from the property and to account to you for it, rather than to the landlord, until the debt was paid, but I have not come across this being used in practice and I would suspect that the forfeiture (see below) would be more effective. For all these reasons I suspect that you would have to “take the bull by the horns” and, once you had obtained judgment 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. You may find that any mortgage-lender will pay up at this stage, even if they have been declining to pay before. Forfeiture 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 judgment. You are also likely to find that the leaseholder will be ordered to pay most if not all of your legal costs of the forfeiture. In most cases of this kind, the lease is never actually forfeited. The leaseholder can stop the forfeiture before it gets to Court by paying all the sum owing, plus costs. If he genuinely can’t pay, and the case gets to Court, then the usual outcome is that a forfeiture order is made, but suspended so long as the leaseholder pays the current ground rent and service charges, and a regular fixed payment (say monthly) off the arrears.

Question 2

Taking legal action against service charge non-payers

Accepted Answer

Our Residents’ Management Company is about to start legal proceedings against a house-owner who hasn’t paid any maintenance for more than 3 years – they have only made one payment since moving in and are currently renting out their house. The company owns the freehold with home-owners each having a share. The complex consists of flats and houses, with the flat-owners owning a leasehold and the house-owners owning a freehold. The debtors have been sent regular requests for payments and at least one solicitor’s letter, all of which were ignored. Our solicitor has suggested a small claim and before Christmas I sent a recorded delivery letter to the 2 owners requesting the amount outstanding and giving 30 days to pay before legal action would begin. One of the owners spoke to the company secretary after receiving the letter and said he would make payment soon but no payment or letter has been received and the 30 days has now expired. Before I start the procedure (I was going to go through Money Claim online) is there any useful wording or examples of how I should complete the documentation? I am also hoping to claim interest and compensation, if possible, as the debt alone is now over £1500. 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, before starting legal proceedings, 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. If there is a mortgage registered against the flat, 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 either gets judgment for the arrears from the County Court, or else applies to the Leasehold Valuation Tribunal for a ruling that the service charges have been properly incurred and are payable. If you think that this leaseholder, or any other leaseholders in arrears and against whom you may have to take similar action, are likely to contest the amount payable in some way, I would recommend going down the LVT route. 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 it seems that there is no dispute, it is just that they can’t or won’t pay, then you would do better to take proceedings in the County Court for a money judgment. If you have obtained either a money judgment from the County Court, or a ruling from the LVT 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 not have a choice of avenues, and you would have to take proceedings as a small claim in the County Court with a view to getting judgment for the sum owing. I have not seen a copy of your lease so I am not clear whether it stipulates that interest should be payable on unpaid arrears of service charge. If it does, then you can include in the Claim Form the rate of interest set by the lease. If the interest is not set out in the lease, then you would have to ask in your Claim Form for interest, calculated in line with the statutory rate. The Court Office should be able to clarify what this currently is. You are not generally entitled in a monetary claim to include compensation for your time and trouble, or even for expenses incurred in borrowing money to cover unpaid arrears. This is a cogent reason for having a provision in the lease that interest should be chargeable on unpaid ground rent and service charges. Indeed, the lack of this now constitutes a good reason to apply to the LVT to have all the leases varied. If you do get judgment in the County Court, then, as previously stated, you may find that, if you actually have a county court judgment against a leaseholder, any mortgage-lender may be more prepared to pay the arrears. If they will not, then you still have to enforce the judgment in some way. Judgments do not usually produce payment as if by magic. Bearing in mind the limited secondhand 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 judgment). With property that is currently being rented out, you would in theory have the rather unusual remedy of applying to the Court for a receiver to be appointed i.e. for an agent to be appointed to collect the rent from the property and to account to you for it, rather than to the landlord, until the debt was paid, but I have not come across this being used in practice and I would suspect that the forfeiture (see below) would be more effective. For all these reasons I suspect that you would have to “take the bull by the horns” and, once you had obtained judgment 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. You may find that any mortgage-lender will pay up at this stage, even if they have been declining to pay before. Forfeiture 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 judgment. You are also likely to find that the leaseholder will be ordered to pay most if not all of your legal costs of the forfeiture. In most cases of this kind, the lease is never actually forfeited. The leaseholder can stop the forfeiture before it gets to Court by paying all the sum owing, plus costs. If he genuinely can’t pay, and the case gets to Court, then the usual outcome is that a forfeiture order is made, but suspended so long as the leaseholder pays the current ground rent and service charges, and a regular fixed payment (say monthly) off the arrears.

Taking legal action against service charge non-payers

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