Service charges after a year of lockdown – how to tackle arrears recovery in 2021

Brady Solicitors set out practical advice to help managing agents sensitively tackle service charge arrears and transition out of instalment plans and other short-term initiatives.

Service charge funds are the lifeblood of residential developments. They support the maintenance, shape major works projects and help you, as a managing agent, to deliver the level of property management service you promised your leaseholder customers. The past 12 months however have required extra agility to keep funds flowing, and many managing agents put in place short-term workaround solutions such as instalment plans and leaseholder concessions.

But are these short-term solutions now starting to cause problems?

Talking to our clients at Brady Solicitors, we are hearing that new processes on instalments have resulted in more work for already stretched credit control teams – and created issues when leaseholders have defaulted on the plans.  Additionally, managing agents are telling us that they are not seeing the large rise in service charge arrears that some predicted.

So how do you transition out of this ‘covid-survival’ stage to ensure that management of your blocks is not compromised in 2021 and beyond?

Brady Solicitors set out some practical and expert legal advice on:

  • Good practice for offering concessions to leaseholders
  • How to reasonably bring to an end instalment plans
  • Managing cladding costs and fire safety bills
  • Dealing with current cases that are tied up in possession, and
  • Managing current and future service charge arrears.

1.    Good practice for offering instalment plans or concessions to leaseholders.

If you do want to offer instalment plans or other concessions to help leaseholders meet their service charge obligations, there are a few golden rules to ensure you are able to take action if a leaseholder defaults on their new payment plan:

Put it in writing.  This should include a statement acknowledging leaseholders’ liability to pay under the Landlord & Tenant Act 1985.  Does the payment plan write off the liability completely or simply defer it?

Make it time-limited.  For example, if you are allowing monthly payments in place of the formal obligation set out in the lease for quarterly or six-monthly payments, set out how long this concession will apply for.

Be aware that individual ‘deals’ can cause issues.  One-off arrangements with individual leaseholders can give rise to legal challenges if another leaseholder feels the development’s funds have been compromised by waiving service charges for some and not others.  (For a detailed explanation of this area we would recommend this excellent Tanfield Chambers article).

2.    How to reasonably bring to an end instalment plans

If you have been offering payment by instalments during Covid, you are likely to come across one or more of these four main issues:

  • The realisation that the lease does not allow payment by instalments,
  • The extra work created by managing 12 monthly payments rather than the usual lease defined dates,
  • Cashflow shortages when needing to fund maintenance or fire safety works,
  • Difficulty recovering payments when a leaseholder defaults on their instalments.

Most current leases do not allow for payment by instalments. There is also a risk that where the process continues for a longer period, or without an agreed end date, a leaseholder could argue that the right to pay by instalments has become permanent.

If your instalment plans are not time-limited, or not agreed in writing, how can you bring them to an end?

It will depend, as always, on the lease but your approach should perhaps vary depending if the payment periods are yearly, six-monthly or quarterly.  For example, if leaseholders normally pay quarterly, it would be fair to communicate the end of the instalment program in good time for the next quarter.

If leaseholders pay yearly, you will need to provide more notice and a more considered approach to enable a reasonable switch from monthly to annual payments.

We would always recommend this policy change be done hand-in-hand with your RMC or freeholder client, with a strong emphasis on open and clear communications.

3. Managing cladding costs and fire safety bills

The cost of fire safety work and who pays remains a long-running challenge.  Many of our clients have navigated complex Building Safety Fund applications for qualifying blocks.  For leaseholders, the government has made a series of supportive gestures, hinting at loan availability and vague guarantees of non-payment of the charges.  However, for blocks shorter than 18 metres and/or where the funds do not cover defective fire doors or missing fire breaks, the funding challenges persist.

Whilst sensitive to the funding for the fire safety work, good managing agents will have ensured excellent leaseholder communication will have been a key part of the process, and the section 20 major works process will have been followed or dispensation obtained.

Managing agents need to ensure there is not a hole in the service charge budget and that concessions to individual (or all) leaseholders are not preventing essential fire safety work from being carried out in line with recommendations.  

4. Dealing with current cases that are tied up in possession hearings

The courts have been severely affected by the pandemic and are struggling with a backlog of cases, with some dating back to September 2019 still not dealt with.  Court responses are at best varied and sometimes simply dismissive, although we are seeing a more joined up response to new cases issued from October 2020 onwards.

There is little that managing agents can do to effect change in the court system, but we would recommend you take care with issuing new service charge invoices on sticky cases, and keep in mind the 18-month rule as the clock ticks on.

5. Managing current and future service charge arrears

It is understandable to feel concern about pursuing arrears against the backdrop of Covid but, as the appointed managing agent, you have a duty of care to the development and all leaseholders.  By allowing certain leaseholders to avoid paying, are you in breach of your duties to their neighbours?

Below are some of the most frequently asked questions we receive concerning service charge arrears in the current climate:

  • Can we send a Letter before Action?   More than 60% of leaseholders pay on receipt of an LBA from Brady Solicitors.  We recommend issuing LBAs to recover outstanding arrears before the next period becomes due.
  • Can we issue claims?   We are able to issue claims online.
  • Can we issue judgments? They are taking a little longer, which makes it important to get started with collection now.
  • Are mortgage companies paying? We receive settlements from mortgage lenders on a daily basis.  We have an advantage as we know individual lender processes and have direct contact details for most lenders.
  • Is there a ban on possession proceedings? This was lifted on 21 September 2020. There is no mention of a return.
  • What about defended cases? These are a little harder with the courts delay and the current prioritising of cases. We always seek to secure a negotiated agreement with the leaseholder and avoid a long-drawn-out dispute.
  • Is there anything we cannot do regarding service charge arrears? Not really. We are taking a sensible and thoughtful approach to leaseholders who raise Covid as a reason for non-payment and can agree a tailored process with each client.

Block managers certainly need to be mindful of the short-term use of instalments and consider how obligations for fire safety will practically be met by the service charge budget.  As always, managing agents who ensure clear and open communication will be best placed to navigate an exit from ‘covid-survival’ mode and deliver excellent block management.

For advice on any of the topics in this blog, including bringing an instalment plan to an end, dealing with ongoing service charge arrears or any other legal property management challenge, please do get in touch.

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With hundreds of years’ worth of combined experience, our experts have dealt with nearly every leasehold property matter you can imagine. If you’re currently in need of legal support or advice, please get in touch.

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