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Home | News & events | Legal updates | Can't pay, won't pay: Recovering service charges in hard times

Can't pay, won't pay: Recovering service charges in hard times

02 July 2010

Despite the first signs of a shaky economic recovery, the after effects of the longest recession in 70 years will be felt for some time, not least when it comes to recovering service charges from leaseholders.

Before the recession, collection of service charges was not too problematic, though sometimes landlords were and still are faced with leaseholders applying to the Leasehold Valuation Tribunal (LVT) for a decision on whether or not their service charges were reasonable.

In these still challenging times, non-payment of service charges continues to cause difficulties, and if social landlords cannot collect them, planned improvements cannot be carried out.

Historically, where service charge arrears have accrued social landlords have proceeded by way of forfeiting the leaseholder's lease, which meant ending the lease and repossession by the landlord.

This is a harsh remedy as not only is the lease ended, most importantly, a leaseholder was not compensated for any equity remaining in their property - even after the accrued debts had been paid off. Since the Commonhold and Leasehold Reform Act of 2002 (the 2002 Act) came into force, leaseholders have received extra protection.

Landlords can now only take such action by way of serving a forfeiture notice (in relation to Section 146(1) if the Law of Property Act 1925) after a Court or the LVT has determined a breach of covenant or a condition of the lease has occurred, or the leaseholder has admitted the breach. Any notice of forfeiture can then be served 14 days from the date on which the final determination is made.

In addition, since the 2002 Act came into force, forfeiture cannot be used for debts unless that debt exceeds the prescribed £500.

Therefore, the use of forfeiture has increasingly become of limited value. As an alternative, it is far more effective to obtain a judgment through the county court. This allows a landlord to recover money without bringing a lease to an end by forfeiture.

Proceedings can be issued in the county court and, if the debt is less than £5,000, it will be allocated to the small claims track. Once the claim has been issued by the court, the leaseholder (i.e. the defendant) has 14 days to acknowledge that he or she has been served with the claim, and a further 14 days to file a defence.

If the defendant chooses to do nothing, judgment in default can be entered. However, if the matter is defended, then, in most cases, a hearing will take place. As the matter will be allocated to the small claims track, the hearing will be relatively informal and likely to take place in a district judge's chambers.

The disadvantage for the leaseholder is that once judgment has been secured, a 'county court judgment' will be registered against their name and will remain on the county court's register for six years. Obviously, this will have an effect on their credit rating and is incentive for leaseholders to pay any outstanding service charges before the matter reaches such a conclusion.

However, should a landlord find themselves in the position of having to enforce a judgment, they may not have information about the leaseholder's financial circumstances. The easiest way of obtaining more information about them is to make an application for an Oral Examination. This will require the leaseholder to attend court and answer truthfully questions on their financial standing. If they fail to do so, the leaseholder will be in contempt of court and could be sent to prison.

Once you are armed with this information, any of the following avenues can be followed:

• County court bailiffs can be instructed to seize goods from the leaseholder. These goods will then be sold in order to try to recover the sums due to the landlord. Given that the second hand value of many household goods is minimal and that seizure involves bailiffs actually gaining entry into the leaseholder's property, this is probably not the best method of enforcement.
• An application can be made to the court for an Attachment of Earnings Order. If a leaseholder is in work, this is a method of enforcement worth considering. Once an Order has been made, a certain proportion of the leaseholder's salary will automatically be deducted and paid over to the landlord until the debt has been satisfied.
• An application can be made for a Third Party Debt Order if a leaseholder has, for example, a bank account which is in credit and from which monies could be paid directly to the landlord.
• Assuming there is equity in a leaseholder's property, an application can be made for a Charging Order. Once a Charging Order is made, it is registered with the Land Registry and this ensures that, when the property is sold, the landlord is paid the amount due from the proceeds of the sale. The obvious disadvantage here is that the landlord must wait until the property is sold before it can recover the monies owed.
• A more drastic measure is to apply to the County Court for an Order for Sale in relation to the leaseholder's property. A Charing Order must be secured in the first instance, after which the landlord can apply for an Order for Sale. Once the property is sold, the amount due to the landlord is paid out of the proceeds of sale. Unlike forfeiture, however, if there is any equity left in the property it is paid to the leaseholder.
• Finally, if all else fails or if the landlord is faced with a particularly difficult leaseholder, they can apply for a Bankruptcy Order if the indebtedness is exceeds £750. The landlord must first serve a Statutory Demand which, quite often, is incentive enough for the leaseholder to pay the amount due, or to at least reach an agreement to pay the landlord in instalments.

If you use some of these remedies and publicise your successes (you should not disclose the details of the leaseholder), this may act as a deterrent to other leaseholders who may decide not to pay their service charges in a timely manner.

© Shoosmiths. This page is for general information: it is not legal advice. Please read our full terms and conditions for details of the disclaimers and exclusions which apply.

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Dot Pawlowski

Associate
T: 03700 86 4197
I: +44 (0)121 625 4197
E: dot.pawlowski@shoosmiths.co.uk