Life after You Buy Your Freehold: Service Charge Disputes

I receive a large number of queries from leaseholders about how best to manage their block of flats after they have bought their freehold -- so I am dedicating the next several blog postings to this subject.

One painful shock for leaseholders that have spent years trying to acquire their freehold and get rid of the old landlord is to end up with leaseholders that refuse to pay their service charges to the new owner of the building.

This happens most frequently in a block of flats where some people chose not to join the freehold purchase. But it can also occur in a building where everyone participated in the Collective Enfranchisement.

Legislation in England and Wales used to give huge power to freeholders of blocks of flats, including the right to kick out tenants for failure to pay even small amounts of money due. But, in recent years, the pendulum has swung to the other extreme, away from the owner of the building and in favour of the resident. This includes effective rights for a leaseholder to stay on in a building even after failing for months or years to pay service charges due.

The freeholder, in theory, does have a right to "forfeit the lease", ie- to seize ownership of the flat, if the leaseholder fails to comply with his/her obligations within the lease. But, in reality, courts in England and Wales are extremely hesitant to grant a forfeiture right to a freeholder. For this reason and because seeking forfeiture often represents using a sledgehammer to crack a nut, freeholders should not choose forfeiting the lease as a first option.

The most expeditious route, in many cases, for the freeholder to get payment of service charges by a non-payer is to file a straight-forward debt-collection case against the leaseholder in County Court.

Companies that are formed by leaseholders to buy their building freehold, "resident management companies" (RMCs), can best tackle the problem of non-payment of service charges by being transparent, proactive, thorough, egalitarian, professional and communicative.

RMCs should be transparent by creating a written policy regarding late payment of service charges. The managing agent that is running the building on behalf of the RMC should be instructed by the RMC's board of directors to send a template "chaser" letter two weeks after a service-charge payment deadline has passed. A second reminder letter should be sent, say, two weeks after that. A third and final letter should be sent by the managing agent to the non-payer, advising that the matter is now being referred to a solicitor and that payment of the debt will now only be accepted by the solicitor's office.

RMCs should be proactive and thorough by sticking to the agreed drill and seeing through to the end any matter of non-payment of service charges. It is mistake to make exceptions and allow some debts to remain unpaid.

RMCs should be egalitarian and professional by applying equal treatment to all leaseholders and by leaving the managing agent the responsibility of collecting service charges. Directors of the RMC should not collect service charges or get involved in bilateral discussions with a leaseholder about his/her non-payment. Sometimes an RMC director will try to be a "good neighbour" by granting a payment extension to a non-payer. This is very bad practice, as the board of directors can easily be accused of abusing power by showing favouritism to one household over another. This practice creates a dangerous precedent. All leaseholders need to be required to comply with the obligations within the lease, including to pay their bills on time. It goes without saying that the directors of the RMC have the same obligations as do any other leaseholders to settle service charge invoices fully and in a timely manner.

RMCs should, via the managing agent's office, be communicative about the freeholder's commitment to and proactive policy about collecting service charges. This includes alerting leaseholders about any general problem with non-payment of service charges.

The RMC needs to send out the message loud and clear.

Any failure to pay one's service charges means: (1) the non-payer is denying payers' rights to ensure the building is properly maintained and repaired; and (2) compliant leaseholders are effectively being forced financially to subsidise the non-payer's presence in the building. Both practices are, of course, totally unacceptable.

After a matter of non-payment of service charges has been referred by the managing agent to the freeholder's solicitor, the solicitor will normally send one or two letters to the leaseholder requesting payment. In the event of continued non-payment, the solicitor will need to be instructed by the RMC to file a debt-collection claim in County Court. Often, a letter from a solicitor requiring payment and threatening legal action is enough to prompt the non-payer to settle the bill.

In settling the debt, the non-payer should always be required to pay the service charges and ground rent due -- and also the legal bill and any court filing fees that have been incurred by the freeholder.

Although it's a time consuming task, it is important for the RMC, after the freehold has been bought, to assign one director the responsibility of agreeing on a debt-collection procedure with the solicitor. This way, directors on the board are not being dragged repeatedly into discussions about how to address each individual instance of non-payment.

Sometimes a leaseholder will challenge the reasonable of service charges by claiming that the charges are too high or that a particular cost item cost is not justified. The leaseholder has a right, in this case, to apply to the Leasehold Valuation Tribunal (LVT) and this specialist tribunal then decides whether the service charge is reasonable. Similarly, the freeholder has the right to apply to the LVT and to ask the tribunal to determine whether a certain disputed service charge may be collected.

Leaseholders and RMCs often represent themselves at "reasonableness of service charge" cases at the LVT, since many solicitors steer clear of these labour-intensive assignments that can focus on small amounts of money. A few years ago there was an LVT case, brought by the RMC against a leaseholder that had disputed and refused to pay an annual service charge item totalling less than £20. The RMC spent a few hundred pounds in filing fees to bring the case to the LVT, dedicated long hours by one of the volunteer RMC directors and, in the end, lost the case. The LVT decided that the freeholder did not have the right to make leaseholders pay this particular cost item.

But, the resident-owned RMC, was not dismayed. Firstly, the matter had been decided by impartial body in a transparent manner, so that all confusion was thus eliminated.  

Also, by going to the LVT, the RMC, having recently bought the building freehold, succeeded in sending a clear message to leaseholders that the new freeholder would proactively enforce the requirements in the lease to pay service charges.

If you and your neighbours are planning to buy your building freehold or if you have started the process, don't feel discouraged about this talk of service charge disputes.

Blocks of flats that boast the best record of service charge payment compliance are buildings that are owned by the leaseholders. This is because resident-owned blocks are more likely than those owned by absentee corporate landlords to establish a  "zero-tolerance" policy regarding non-payment of service charges.

I wish you success in creating a grown-up culture within your resident-owned block of flats, where people take responsibility and comply with service charge payment requirements.

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