Prepared by Carl Maw, Litigation Solicitor at Brady Solicitors. Brady Solicitors advises managing agents, leaseholders, freeholders, RTM companies, and RMC directors on service charge arrears recovery, property management disputes and residential leasehold litigation.
In a situation where service charge arrears are accumulating, a payment plan can feel like a reasonable solution. A leaseholder is behind but you want the relationship to stay intact, so you agree to let them pay in instalments, you note it informally, and you move on.
The problem is not necessarily with the instalment but with everything that surrounds it. A badly structured plan can weaken the freeholder’s enforcement position, reduce your ability to recover costs, leave the limitation position unclear, take up a significant amount of your team’s time and create a cash flow problem across the block. In the worst cases, it can put the management contract itself at risk.
The legal trap: What accepting payment does to enforcement
Accepting payments from a leaseholder in arrears, or agreeing a plan with them, is not a neutral act. Depending on when it happens and how it is recorded, it can affect the freeholder’s remedies, the recoverability of legal costs, and the limitation position on the debt.
Forfeiture is the issue that is most often misunderstood in relation to payment plans. The right to forfeit for a breach of lease, such as missed service charge payments, can be lost by waiver, where the freeholder knowing of the breach, acts in a way that treats the lease as continuing, for example by demanding or accepting sums that fall due after the breach. Agreeing a payment plan and then collecting the next demand as normal can therefore have consequences for the right to forfeit, and a “reservation of rights” in the plan will not necessarily prevent that. Whether waiver has occurred depends on the lease, the sequence of events and the statutory restrictions on residential forfeiture and should be considered separately with specialist legal advice.
In terms of costs, the danger is not payment itself, but payment arriving while an unrecorded plan is running alongside a live claim. A leaseholder who pays after a claim has been issued may remain liable for costs already incurred, but the costs recoverable will depend on the track to which the claim is allocated, the stage reached and the terms of the lease. On the small claims track, recovery of legal costs is generally restricted, although court fees and certain limited costs may be recoverable. Claims allocated to the fast track or intermediate track may instead fall within the fixed recoverable costs regime under Civil Procedure Rules (CPR) Part 45. Separately, where the lease contains an appropriate costs covenant, the freeholder may have a contractual basis for seeking its legal costs, subject to the terms of the lease and any applicable statutory controls.
If the agent has informally agreed instalments and continued to take them while the claim proceeds, the leaseholder may argue that the claim has been compromised on those terms, potentially affecting the recovery of costs incurred afterwards. Simply discontinuing the claim may also have costs consequences. Outside the small claims track, the general rule is that a claimant who discontinues is liable for the defendant’s costs incurred up to discontinuance, unless the court orders otherwise.
The practical rule is this: do not agree a payment plan once proceedings have been issued without taking legal advice first. A plan agreed at that stage should be recorded in a consent or Tomlin order that stays the claim, records the instalments and the costs position, and allows the claim to be restored if an instalment is missed.
The cash flow problem across the block
Even where there is no litigation in play, payment plans create a structural cash flow problem. Service charge funds are collected to meet budgeted expenditure in the period they relate to. When a proportion of leaseholders are on payment plans, the money comes in over months rather than weeks, while the commitments it is meant to fund remain fixed.
In our experience it is not unusual for 10% to 15% of leaseholders in a block to be on informal payment plans at any given time. The agent may then be unable to fund planned maintenance works, and if the works are an obligation under the management agreement or the lease, that shortfall is a potential breach for which the managing agent may be held responsible. Freeholders and RMC directors who discover that works were delayed because of a cash flow position created by multiple informal plans have grounds to challenge the agent’s performance, all the more so if the plans were never disclosed.
The reserve fund consequence
Reserve funds are the starkest example of the cumulative effect of payment plans. A reserve fund collects contributions over time so that the block can meet major expenditure without a large one-off demand. If contributions are deferred because leaseholders are on payment plans, the fund grows slower than the budget assumes, and over several years the shortfall can be significant. When a major item arises, the agent faces a choice between delaying necessary works, making a supplementary demand, or drawing on current service charge funds to bridge the gap.
Why informal plans are the most dangerous kind
The danger is increased when plans are agreed informally: by email, by phone, or simply by not chasing when a leaseholder pays less than the full demand. An informal plan creates uncertainty about its own terms. Is it an acknowledgment of the debt? Does it reset the limitation clock? Does it affect liability for interest (where the lease provides for it) or administration charges? Without a written agreement, the answer to all of those questions is unclear.
The limitation point matters in particular. Under the Limitation Act 1980 a claim for service charge arrears must be brought within six years of each instalment becoming due and payable where the lease reserves the service charge as rent (section 19), and otherwise within twelve years (section 8). While the period is running, either a qualifying written and signed acknowledgment of the debt or a payment towards it restarts the clock, so part payments usually keep the debt alive. There are three qualifications. Where the service charge is reserved as rent, a part payment does not extend time for the remainder then due. Once the period has expired, a later acknowledgment or payment cannot revive it. And an acknowledgment only counts if it is in writing and signed, although a name typed at the foot of an email may be enough.
The solution is not to stop using payment plans. It is to formalise them. A signed written agreement that acknowledges the full debt, sets out the instalments, requires the plan to clear within the current demand period, and reserves the right to claim the full balance, interest and costs on default deals answers all questions at once. It also does something more valuable: a signed admission that specified sums are payable may prevent a later challenge to sums expressly agreed or admitted, and it satisfies the admission requirement that applies before forfeiture for service charge arrears can be pursued.
Plans that extend beyond the demand period
One of the most common errors we see is a payment plan that runs longer than the demand period it relates to. If a leaseholder owes service charges for the year ending 31 March and the plan clears the balance by 31 December of the following year, new demands will have fallen due before the plan completes. The agent is left with overlapping balances from multiple periods and no clear picture of what is owed, under what terms, or when each element became due and payable.
That complexity has a direct effect on enforcement. The first thing solicitors will ask for is a breakdown of what is owed and when each amount became due and payable. If the arrears span several periods, include overlapping informal plans and undocumented part-payments, that complexity takes time to unpick and therefore adds cost before a single letter has been sent. We suggest that plans are structured to clear within the demand period, and that any plan running longer than three months is reviewed before the next demand date to confirm whether the position should be referred to solicitors.
What a property structured payment plan looks like
A payment plan that protects the managing agent’s position has the following features:
- It is in writing and signed by the leaseholder. The written record serves as a qualifying acknowledgment of the debt for limitation purposes, as an admission that the sums are payable, and as the terms on which instalments are accepted.
- It identifies the full balance with a breakdown by demand period, so there is no later dispute about what the plan covered.
- It sets a clear completion date within the current demand period, which limits the carry-forward problem.
- It is interest-free and structured carefully from a consumer credit perspective. An agreement allowing an existing debt to be repaid by instalments can engage consumer credit legislation, depending on the nature and terms of the arrangement. However, exemptions remain available in some circumstances.
- It reserves all rights, for the right reasons. The agreement should confirm that it does not vary the lease, that the full balance becomes immediately payable if an instalment is missed, and that the right to claim the balance, interest (where the lease provides for it) and enforcement costs is preserved. It should not be relied on to preserve the right to forfeit, which should be considered separately with specialist advice.
- It is not agreed once proceedings have been issued without legal input. A plan agreed during live litigation should be recorded in a consent or Tomlin order, so that the costs position is protected and the claim can be restored on default.
- Finally, it is disclosed. Deferring the payment terms set by the lease is a decision for the freeholder or RMC, not the agent, and the RICS Service Charge Residential Management Code expects agents to operate a written arrears policy agreed with the client. Plans that affect the income profile for the period belong in the management report.
Payment plans are not inherently problematic. Used selectively, documented properly, and kept within the current demand period, they are a legitimate way of resolving a short-term arrears position without proceedings. The difficulty arises when they become the default response to non-payment, are agreed informally, and accumulate across a block without anyone tracking the aggregate effect.
