Prepared by the Brady Solicitors Litigation Team. Brady Solicitors advises managing agents, leaseholders, freeholders, RTM companies, and RMC directors on service charge arrears recovery, property management disputes and residential leasehold litigation.
A debt that is a year old is a problem. A debt that is three years old is a difficult problem. A debt that is older than six years may be a problem you cannot solve at all.
In our experience, most of the complex, expensive service charge cases we deal with did not start as complex cases. They started as small arrears that nobody chased. By the time a managing agent or RMC director finally takes action, the debt has accumulated with each passing demand period, the leaseholder has often moved or sold the property, the addresses on file may be wrong, and the legal position has become significantly harder to navigate. This article explains how that happens, why it matters for the whole block, and what good practice looks like.
How arrears build up and why they matter for the block
There are understandable reasons that arrears are left unpursued. Managing agents are resource-constrained and manage large numbers of units. When a leaseholder falls behind by a few hundred pounds, chasing it formally may feel disproportionate. Payment plans may get agreed informally to keep relationships civil. Demands go out, part-payments come in, and the balance drifts upward without anyone treating it as a priority.
The problem is that this approach has a compounding effect. A leaseholder who pays half the demand this period and half the demand next period is never getting clear. And a managing agent who accepts that pattern across a block is not resolving a debt problem, they are managing it indefinitely at increasing cost to the building.
The impact extends beyond the individual arrears. Service charge funds are held on trust to meet the costs of the building, and a balance that is never collected does not simply vanish: where the lease permits, the shortfall is made good through the service charge and the other leaseholders end up paying for it; where it cannot be, it falls on the freeholder, which is one of many reasons to not let arrears reach that point.
There are also legal reasons to act quickly. Under the Limitation Act 1980, the time available to recover service charge arrears is generally either six or twelve years, depending on the wording of the lease, with the limitation period running from the date each payment became due. Once that period has expired, court recovery will usually no longer be possible if the leaseholder raises limitation as a defence. Although a payment towards the debt or a written acknowledgement from the leaseholder may sometimes extend the limitation period, this will not always protect a freeholder’s position, particularly where service charges are treated as rent. For that reason, managing agents and freeholders should review and pursue arrears promptly rather than relying on informal payment arrangements.
The consequences of letting arrears age
Even within the limitation period, arrears that have been left to build present legal and practical obstacles that make recovery significantly more expensive.
The first of these obstacles is that leaseholders move. Over a three-year period, particularly in a block of any size, you can expect some units to have changed hands. Contrary to a common assumption, service charge arrears do not ordinarily pass to the buyer. The precise position depends on the terms of the lease and, particularly for leases granted on or after 1 January 1996, on the Landlord and Tenant (Covenants) Act 1995, but as a general rule each demand is the personal liability of whoever held the lease when it became due and payable. Although the purchaser will not ordinarily become personally liable for the seller’s accrued service charge debt, an existing breach may still have consequences for the lease, including potential forfeiture issues, subject to the terms of the lease, waiver and the statutory restrictions applying to residential forfeiture. That is why buyers’ solicitors insist on arrears being cleared or retained on completion. If that did not happen, you may be left tracing a former leaseholder who has no continuing connection with the building: a manageable exercise at six months, a significant legal task at three years.
Contact details may also go stale. An address that was accurate in 2022 may not be the right address in 2026, and if a leaseholder has changed their correspondence address without telling you, demands and letters may have been going to the wrong place for years. Many leases provide that service at the flat itself is good service, and up to three addresses can be recorded against the title at the Land Registry, so the position is often recoverable. But a demand that was not served in accordance with the lease, or that did not contain the statutory information (the freeholder’s name and address under sections 47 and 48 of the Landlord and Tenant Act 1987, and the summary of rights and obligations under section 21B of the Landlord and Tenant Act 1985), is not payable until a compliant demand is served. We recommend managing agents audit their contact records regularly and document every address change in writing.
There is also a direct relationship between how long arrears are left and how much it costs to recover them. A straightforward debt of £2,000 that is six months old, where the address is correct and the demand was properly served, is a relatively contained piece of work. A claim of that size will ordinarily be allocated to the small claims track, where the court will only award fixed costs, so recovery of your legal costs from the leaseholder depends on the lease containing a clause that allows it. Most do, and the Court of Appeal has confirmed that such a clause is enforceable notwithstanding the small claims limit, although the amount claimed must be reasonable and can be challenged in the First-tier Tribunal as an administration charge. Where the lease allows it, the cost of a simple, early claim is likely to be significantly less than the debt itself.
The same debt at four years old, with possible errors in the contact address details, several changes of leaseholder, and a question over whether some of the historic demands were validly served, is a different matter entirely. It may still be recoverable, but the legal costs of untangling it will be substantially higher. In some cases we have dealt with, the cost of pursuing the debt has exceeded the amount being claimed. However, the decision cannot always be looked at purely in terms of the value of the individual debt. Managing agents and freeholders should also consider the message that deciding not to pursue arrears may send to other leaseholders in the block, particularly if it creates the impression that unpaid service charges will eventually stop being chased.
There is also a specific legal trap when arrears span multiple demand periods. It can be tempting to pursue the most recent arrears first because the debt is cleanest and the prospects of recovery are good. Each unpaid demand is a separate cause of action, so there is no absolute rule that all arrears must be claimed together. However, if you obtain judgment on the recent arrears and later issue a second claim for the historic balance, the leaseholder can argue that the second claim is an abuse of process because it could and should have been brought with the first. The court will look at all the circumstances rather than apply a fixed rule, but the risk is real, and even where the second claim is allowed to proceed the court may penalise the claimant in costs for the unnecessary duplication. There is also the more mundane cost: two sets of court fees and solicitors’ costs, and a second opportunity for the leaseholder to raise set-off and reasonableness arguments. Before instructing solicitors, carry out a full audit of all arrears owed by that leaseholder and make a deliberate decision about what to claim and what to write off. We recommend making that decision with legal input.
The problem of aged arrears is regularly experienced by managing agents when taking on a new block and often means inheriting an arrears schedule that predates your involvement. Our experience is that the first few months after a management change are the best window for dealing with this. In that period, you can credibly distance yourself from any previous failures. You can approach leaseholders and explain that you are starting fresh, that you have identified outstanding balances, and that you want to resolve them. Leaseholders are more receptive in that window than they will be 18 months later, when the arrears have grown on your watch and you are no longer the new agent. After that window closes, historic arrears become your problem regardless of who created them.
How to deal with arrears: What good practice looks like
The common thread running through the most difficult cases we deal with is not bad luck. It is deferred decisions.
Good practice in service charge arrears recovery comes down to a small number of clear habits. Demand periods should be tracked and arrears should be identified promptly after each demand date. Any balance that reaches the end of a demand period without payment should be escalated, not carried forward. Contact details should be audited annually and every change recorded in writing. Payment plans, where used at all, should be agreed in writing, include an express written and signed acknowledgment of the full balance owed, and be timed to clear within the current demand period. They should be treated as the exception rather than the rule. And where costs are incurred that will not be demanded within 18 months (major works billed on completion are the usual example), a section 20B notice should be served to protect the position.
The question we are most often asked by managing agents is when they should instruct solicitors. The answer is earlier than a lot of them do. Involving a specialist early does not mean issuing proceedings immediately but it does mean getting the legal position assessed while the debt is still simple, while the records are in order, and while the options are still open. A short conversation at six months’ arrears is significantly cheaper than a complex piece of litigation at three years.
In summary
Arrears rarely become unrecoverable overnight. They age one missed demand period at a time, and with each period the law tightens, the records thin out, the leaseholders move on and the cost of recovery rises until it can exceed the debt itself, leaving the rest of the block to pick up the shortfall. The agents and directors who avoid that outcome are not the lucky ones; they are the ones who acted early.
