From your perspective as the managing agent, you need to take care that you are not being led by the freeholder’s agenda
When acting for an rmc, managing agents will often be asked by their landlord and its legal advisers to combine the ground rent debt with the service charge arrears.
There are clear advantages to the landlord of this approach but it can cause problems for the RMC – and a potentially dangerous conflict of interest for the managing agent.
Managing agents should consider carefully the implications on their RMC clients before agreeing to have the two sets of arrears treated as a single recovery process.
A primary consideration must be which party has the right to demand the service charge payment in the first place. Whilst the landlord has the right to recover the ground rent debt, it is usually the RMC and not the landlord that will have the right to demand - and recover - the service charge arrears. This can present a problematic situation for a managing agent tasked with ensuring that any service charge arrears are pursued as effectively as possible.
It can be sensible to help leaseholders get ‘back into the black’ by agreeing a repayment schedule for larger arrears.
However, when a part-payment is made on a combined ground rent / service charge debt, which part of the arrears will it be allocated to first? Will the landlord insist that the ground rent is settled before the RMC gets their service charge portion? Managing agents must clarify this for the benefit of the block.
Additionally, although the freeholder may say that the debt cannot be pursued without the right to forfeit, this is not always the case and payments can often be obtained from lenders on a monetary judgment. Under the terms of the lease, it is generally the RMC, and not the landlord, that is able to pursue a monetary judgment.
In the small number of situations where there is forfeiture in respect of the combined ground rent and service charge debt, the landlord will be entitled to the proceeds of sale as and when the property is sold. Managing agents must be clear on what assurances can be given to the RMC directors that they will receive payment of the service charge arrears. Indeed, what assurance do you have from the landlord that they will sell the property at all?
“Where legal advisers act for both the landlord and the RMC directors they must consider the implications of combining the debt and ensure that there is neither conflict of interest nor the potential for a future dispute between RMC and landlord”, advises Clare.
“From your perspective as the managing agent, you need to take care that you are not being led by the freeholder’s agenda, rather than acting in the best interests of your RMC client.
“The most sensible option is to consider the factors mentioned above and, if necessary, keep service charge recovery separate from the ground rent arrears. Your solicitors will be able to talk you through any potential conflict of interest.”
Clare Brady is Managing Director of Brady Solicitors