Brady Solicitors’ Harpreet Lehal explains how the size of the service charge debt will impact on recovery procedures, with implications for both forfeiture and legal costs.

We all know the importance of chasing service charge arrears effectively, and using an expert solicitor is a key part of that process. If the claim has to proceed to court, the size of the debt determines whether it is handled within the small claims court or fast track process.

In an ideal world, service charge and ground rent arrears are settled by internal debt recovery procedures.  However, no matter how good your management and processes are it is inevitable to see some persistently defaulting leaseholders and your solicitors may end up going to court on your behalf to recover the arrears.

The size of the service charge debt is crucial:

  • Service charge debts of £0 to £9999 will be handled in the small claims court (debts over £350 will trigger forfeiture proceedings).
  • Service charge arrears of £10,000 or more are put on the fast track, which is separate to the small claims court.

Consider the limit of £350 on forfeiture

As we know, once arrears have reached £350* this can be defined a breach of the lease.

Most modern leases also contain a clause that means the leaseholder will have to pay the landlord’s costs in recovering the outstanding arrears. Essentially this is what allows specialist solicitors to work on a no win no fee basis. The £350 amount is also the key trigger to allow forfeiture proceedings.

If possession proceedings have started, and it is found the amount of arrears has changed, or has been negotiated to below £350, then the situation is different. The leaseholder is no longer liable to pay the landlord’s legal costs and the landlord can no longer forfeit. The landlord may be held liable for the legal costs incurred; therefore it is advised that all outstanding debts are detailed carefully to ensure the claim is over £350 before you start recovery proceedings.

Fast track recovery and the impact on costs

Higher value amounts of service charge debt can build up surprisingly easily,for example if major works have been conducted, such as a new roof or foundations works, combined with years of outstanding service charge. If the total amount is over £10,000, your claim will no longer be handled by the small claims track but will instead be allocated to the fast track court process.

Claims in the fast track are handled differently to small claims. Should the case be found in favour of the defendant, you will be liable to pay their legal costs as well as your own. This is unlikely to be covered within any no win no fee procedure you may have agreed with your solicitors.

Prevention is the best cure to avoid large sums building up

There are a number of ways managing agents can avoid large service charge debts building up:

  • Act quickly to recover the outstanding amounts before the arrears start to mount, this can be helped by tightening up internal debt collection processes
  • Consider reducing the amount of credit control letters before arrears are passed to your solicitors.
  • Have a plan for serial “non-payers”.
  • Instruct solicitors earlier to ensure claims can be dealt with in the small claims process.
  • Have a procedure for dealing with funding for major works. Caroline Lee’s article on avoiding service charge arrears after major works projects offers practical advice.

High levels of outstanding arrears can make it difficult to manage the block to the appropriate standard, resulting in potentially unhappy leaseholders. If you are in need of help with service charge arrears of any size – or assistance with refining and improving your service charge procedures, Brady Solicitors’ service charge recovery experts will be happy to help. You can click here to email us or call us on 0115 985 3450.

 

* As defined by Section 167 of the Commonhold and Leasehold Reform Act 2002. This means the total rent and service charge owed must be over £350 or be over 3 years old in order to be able to commence forfeiture.