Service Charge Arrears: Can and should you take steps to recover unpaid charges in light of Coronavirus?

Last week, legislative changes – the Corona Virus Act 2020 and Practice Direction 51Z Civil Procedure Rules – came into effect.  How do these affect those responsible for managing developments and, specifically, do they prevent you from recovering service charges due now? 

The changes provide little protection for property owners (usually leaseholders) who pay service charges.  Accordingly, service charges that should have been paid and which are required to run developments, can still be recovered now.  Internal debt recovery processes should continue, to ensure that those due to pay are provided with every opportunity to pay. Where payment is not forthcoming though, you are able to progress action for recovery of unpaid charges without delay.

We have been asked the following questions: 


1. Are property owners exempt from paying service charge for at least three months?

No, this is a misunderstanding of comments relating to tenancies/mortgages and has no application to service charges.  

2. Given the current circumstances, should I discount or allow a deferment of charges?

Discounts: In most developments you could not apply a discount even if you wanted to as you have no resources to cover the resulting shortfall.  You could not charge that shortfall to other property owners or use service charge monies to cover it (as that amounts to the same thing). Any discount would have to be funded by the Landlord from its own funds. 

Agreements to defer payments: You could agree arrangements where, in your opinion, it is right in each specific case, but be careful.  Our advice is that your starting point is NOT agreeing to a deferment, but instead to enter into a discussion on that subject if, in your opinion, the individual property owner absolutely needs it.  

Our recommendation is to listen, act accordingly based upon your own assessment of a property owner’s needs, be open to agreements to defer or take instalments where you believe that is the only sensible course of action.  However, avoid an immediate willingness to strike a deal as most residents will not NEED a deferment.    

3. If the owner has lost their job and has no money, how can they possibly pay?

The vast majority of arrears cases result either in the property owner making payment themselves or through their mortgagee. If a property owner is unable or unwilling to pay and owns the property subject to a mortgage, then the mortgagee will make payment once the charges due have been determined. 

That determination is obtained either through a Court judgment or, far more cheaply for the paying owner, through an admission of the debt.  It is therefore possible, even now, to proceed with a matter to the point where the mortgagee will make payment. If the property owner is communicative and willing to minimise their liability for costs, then this process can be concluded swiftly and without the need for a Court judgment.

4. Are mortgagees still working and making payments?

Yes, mortgagees are continuing to process payments.

5. If the Courts are closed, how can you enforce?

The Courts are open, running and, importantly, they continue to process debt claims.  The First Tier Tribunal (FTT) is not progressing matters at this stage but almost no claims for arrears will reach the FTT in any event – most being concluded before or within the County Court.

6. Surely, the Court will not let you forfeit a lease at the moment – so what’s the point?

The Courts and Tribunal Service have just implemented Practice Direction 51Z Civil Procedure Rules which from 27 March 2020 stayed all possession claims for a period of 90 days.  In reality, this change need not affect your ability to recover as only a tiny percentage of arrears cases reach the issue of a claim for (possession) forfeiture.  Almost all cases are settled by the owner or their mortgagee long before that stage is reached. 

7. Is there any harm in delaying any enforcement until after this pandemic has passed?

Yes, potentially quite a significant one in the case of most developments.  Given that it cannot be known for sure when the current COV-19 position will end the question really needs to be, how long is the Landlord or Management Company able to run the development if it receives no or only some of the monies it has demanded? Most developments require all or most owners to pay in full and on time which is why most well-run developments will have clear recovery processes in place to ensure that there are no sizeable arrears.

You should also consider that if enforcement steps are delayed until only after this crisis is over, it will take, in most cases, at least 3-9 months to recover monies owed (and that takes no account of how slow the Courts may well be at that stage).  If we really are only returning to normality toward the end of summer 2020 (and of course it may be later), how long can the Landlord/Management Company carry the debt and still provide all of the services it is contractually obliged to provide?  

We must accept that this is an unprecedented period of time and some of the decisions to be made by those who manage developments will be tough.  However, you/your clients need to weigh up carefully the continuing contractual obligations to the property owners and residents and be clear how they are to fund those.  If the development has reserves, then you may take a different view than you would on one that runs with tighter funding.  However, because no one is able to say when this current position will end, even that approach is also not without risks.

The advice is to change nothing. If enforcement is required, then you enforce; do not delay just because the world looks a little different at the moment.

Kevin Lever, Principal Solicitor at KDL Law. Specialists in Residential Leasehold Enforcement

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