Direct payments from leaseholders in breach of their duty to pay service charge and who are being pursued by legal advisers, can cause a real headache for managing agents and their service charge and ground rent collection processes.

Brady Solicitors offer expert and practical advice on how to deal with leaseholders making direct settlement of service charge or ground rent arrears, after the debt has been passed to the legal team.

As a managing agent you will be all too familiar with the following scenario:

  1. A leaseholder fails to pay their ground rent and/or service charge;
  2. You issue a reminder for the outstanding arrears;
  3. No payment is made by the leaseholder, so you refer the collection of the arrears to your legal advisers;
  4. The leaseholder receives the legal letter and pays (usually without warning and by BACS) the arrears sum directly to you – but does not pay the legal fees.

Your freeholder or RMC/RTM client will not want to be held liable for the unpaid legal fees, so what is the best way to protect them from that costs liability?

If you accept direct payment from a leaseholder, this can constitute a waiver of the right to forfeit, which could be detrimental to a claim for costs.

Acceptance of the payment should therefore be strictly avoided.

However, no agent would want to return a payment that has been chased for so long! Furthermore, some judges will not look favourably on the payment being returned to the leaseholder only for proceedings to continue.

The best steps in most cases are therefore as follows:

  1. Tell the leaseholder (or instruct your legal advisors to do so) that the payment will be held in a suspense account and will not be accepted until all proceedings (including any forfeiture proceedings) in respect of the debt have concluded.
  2. Hold the payment in a suspense account pending the conclusion of the claim.
  3. Check if the leaseholder has sent any correspondence referring to the payment. If there is correspondence which refers to the payment being tendered in full and final settlement careful consideration needs to be given as to whether to accept the payment or even hold in a suspense account. In those circumstances you may wish to return the payment. Legal advice should be sought on these occasions.

On a practical note, we would recommend that you carry out bank reconciliations as frequently as possible as the sooner direct payments are spotted, the less likely abortive legal costs are to incur.

The way to deal with direct payments can differ, depending on the circumstances. The golden rule is to inform your legal advisers as soon as possible after you are aware of a direct payment having been made.

The right to claim costs is not necessarily lost on the leaseholder having made a direct payment net of legal costs as long as the correct steps are taken.

Contact Brady Solicitors for specialist advice on effective service charge recovery.