Key considerations to make when looking into service charge payments by instalments
We’re regularly asked by managing agent clients, especially in January, as to whether they should offer a payment plan option to leaseholders who are struggling with service charge arrears. When dealing with a leaseholder who can’t pay rather than won’t pay, it may seem to have value, but there are some key considerations to make before potentially going down that route.
Key considerations:
- What does the lease say?
As with most leasehold related queries, the best place to start is the lease. We would always advise our clients to make service charge demands in accordance with the lease to avoid potential disputes. If the lease does not state that instalements can be offered, then there is a decision to be made. Indeed if the lease is silent then there is an argument you cannot. You may also need to be wary of creating a situation of estoppel, where past conduct can be used to argue that the leaseholder has a right to instalements rather than you choosing to allow payment being made this way. - Can you resource the additional administration work involved in payment plans?
At Bradys we’ve seen a number of managing agent clients come to us because they’re struggling to deal with the increased workload due to leaseholders making service charge payments by instalments. This can be due to a number of reasons, such as having to chase payments more regularly, as instead of becoming behind on a quarterly service charge, the leaseholders are continually late on their monthly payments. Additionally, do you have the required systems to manage payment by instalments so that payments are allocated correctly, and any shortfalls or missed payments are picked up and dealt with quickly and efficiently. - Can you setup instalments that will clear the arrears before the next service charge demand is due?
If you choose to offer a payment plan option, you don’t want the instalments to be so small that the leaseholder is still in arrears when the next service charge demand is due, otherwise you risk the payment plan becoming never ending. In general 3-6 months should be the maximum. - Will offering a payment plan option to the leaseholder encourage others to utilise it?
If you provide one leaseholder with a payment plan, there is the chance other leaseholders may become aware and ask for the same arrangements. If this happens you’re then in a position were it is hard to say no having already said yes to another leaseholder. - Are payments by instalment suitable for the development?
Consider whether smaller, more regular payments, will support or hinder your cash flow and therefore your ability to manage the property. Also, if you allow service charge payments by instalments, will the amount be sufficient to cover costs at the time projects are scheduled.
Summary
Ultimately payment plans can be very beneficial for genuine leaseholders struggling to make the larger, less frequent payment. However, the impact that they can have on the managing agent should not be underestimated, whether that be the increased workload or the knock on effect on cash flow. Especially if putting a payment plan in place for one leaseholder leads to numerous additional requests from others.
