When leaseholders don’t pay, or fall behind with, their service charge payments it can cause problems for everyone else in the block. Managing agents and resident management companies may not have enough funds to carry out important maintenance or provide key services.
How to help prevent arrears
Leaseholders should understand what they are paying for, how much they will be asked to pay, and when, so that they can budget accordingly.
Service charges can typically cover maintenance, repair and renewal of communal items and areas, as well as insurance and any administrative and building management costs. What is included should be set out in everyone’s leases, so consider only approving permitted expenditure to avoid future challenges.
What you could do is set out in a budget at the start of each year the costs that leaseholders will be sharing. This would allow you to split it all into day-to-day costs and reserve funds to cover major items such as external redecoration or roof repairs.
When it’s time to circulate invoices, make sure your service charge demands are correctly presented and delivered. The free Leasehold Advisory Service is a source of information that can help. For instance, The Landlord & Tenant Act is very specific about how service charges must be demanded.
Following the correct procedures to the letter might seem a bit stuffy in a small block where you all know each other well, but it could be essential to avoid misunderstandings and problems with non-payment.
What to do when arrears occur
What if you’ve done everything correctly and still some people won’t pay?
Non-payment can be a difficult matter to deal with, as there may be those who can’t pay, with genuine financial crises. Then there are those who won’t pay, made up of people who perhaps don’t understand their obligations as leaseholders, as well as people who have a genuine objection to the charges and how their money is being spent.
First and foremost, acting quickly can help. Service charge arrears and a lack of funds may quickly translate into reduced levels of general maintenance and delays to essential works. That might mean unhappy residents, and even a drop in the market value of their homes. They might sue you for such losses if it was felt that you, or other directors of the residents’ management company (RMC), were to blame for poor management of the service charge demands, intentionally or otherwise.
RMCs may choose to take out Directors and Officers Liability Insurance, as it can help protect your personal assets in the event of legal action.
If payment is not received on time, a polite reminder to the leaseholder might help. If that is ignored, then you can warn them about the possibility of legal proceedings. You can also penalise people with late payment administration charges when appropriate.
Most modern leases also allow you to recover solicitors’ costs from a leaseholder, and if the case isn’t disputed (which is more likely if you have followed all the demand procedures to the letter), the late payer can be asked to pay the solicitor direct. Some solicitors, who will manage the whole process for you, may recover fees direct.
What if there is a good reason for non-payment?
There may be a good reason for delayed payment: the property is only just changing hands, someone has died and probate is delayed, or maybe someone has lost their job and doesn’t have savings.
In such cases you may prefer to allow a small delay, accept instalments, or even agree a one-off concessionary reduction. However, check that your lease allows you this sort of flexibility.
What if someone challenges their service charge bill?
Leaseholders have a right to challenge any demand if they think it is unreasonable or if they think it does not comply with the lease.
The process can be long - the complainant is entitled to a written summary of costs incurred in the last accounting year, then has a further six months to ask for sight of accounts and receipts.
If, after that, they are still disputing costs, you might find yourself before the First Tier property tribunal.
Where to go for help
At the end of the day, your main concern is likely to be running the block efficiently.
Getting the budget as accurate as possible and making sure the service charge demands are issued properly, with the right accompanying information delivered at the right time, can help to avoid problems.
The law can be complicated, but the Leasehold Advisory Service offers comprehensive free guidance on all aspects of block management.
The Association of Residential Managing Agents also makes its advice on service charge arrears freely available.