How far back can service charges and rent be recovered?
9th November 2023
9th November 2023
Whilst it should not occur, it is unfortunately a more common problem than it should be. The issue under discussion in this Legal Update is where the payer of service charges, rent or estate rent charges is not pursued for some reason where they have neglected, or elected not, to pay charges due and demanded. How long then does a Landlord (“LL”), RTM Company (“RTM”) or Resident Management Company (“RMC”) have in which to recover those charges.
There are two elements here to consider as follows:-
Time limit for raising demands
The Government some time ago now took the view that it was unfair for a LL/RTM/RMC to, through its own neglect, allow rent and/or service charges to build up without demanding them and then simply impose the built up debt on the poor unsuspecting property owner in one go. Section 20B Landlord and Tenant Act 1985 was the result.
This statutory provision, also known as the “18 month rule” provides the leasehold property owner with an absolute defence to a claim for service charge, where those charges were not demanded by the LL/RTM/RMC within 18 months of the date that they were incurred. See here for further information on the rule and how it works and here on practical measures that LL/RTM/RMCs or their agents should take to ensure that they do not fall foul of this rule.
Time limit for enforcing recovery of rent, service charges and estate rent charges
There are two time limits to discuss here:-
6 years; and
Both arise from the Limitation Act 1980 and provide to the property owner another absolute defence to a claim for sums that fall foul of the limitation period.
The 6 year limitation period
Section 19 Limitation Act 1980 deals with sums that are actually rent or are ‘reserved’ as rent. A sum is either rent or, where the lease or deed under which it is payable states so, then a charge that is not actually rent can be ‘reserved’ as rent - ie, payable and enforceable as if it were rent. Service charge and insurance sums due under a lease or transfer can sometimes be reserved as rent. Older leases will often reserve charges as rent as historically (pre Landlord and Tenant Act 1985) there were advantages in doing so but those advantages are mainly negated by recent legislation.
Section 19 Limitation Act 1980 provides that “rent” is subject to a limitation period of 6 years. Accordingly, where a rent, or other charge reserved as rent, is due and payable on a specific date then, unless proceedings for the recovery of that sum are issued in the Court/Tribunal prior to the expiration of 6 years after that date, then the property owner can avoid liability.
The 12 year limitation period
Charges that are not rent or reserved as rent (or an estate rent charge) and which are payable under a deed/lease, are in most cases (but not all) subject to a 12 year limitation period by s.8 Limitation Act 1980.
Where a debt arising under this heading is due then the action must be issued in the Court/Tribunal prior to the expiry of 12 years from the date upon which it fell due or the property owner may enjoy an absolute defence to the claim for the debt.
Limitation periods are seemingly quite lengthy being a significant number of years in each case. But time does a habit of creeping up on you. That 6 year period can rapidly disappear if a lackadaisical approach is taken to enforcement. In addition, there are basic practical, economic and ultimately good management reasons for not allowing a debt to run unrecovered for too long, and certainly not a number of years without taking steps to enforce its recovery.
There are a number of factors to consider in being lenient toward debtors:-
There are the obvious funding issue - who covers the lack of funds in the interim and how long can the debt be covered?;
There is the ever growing problem issue - where the debtor is not pursued this year they are likely to not pay next year and thereafter exacerbating to point at 1 above;
There is the toothless tiger issue - threats of action which are not followed through are simply pointless. No one is scared of a toothless tiger and so it is important to act and then the following point will likely apply from then on with little to no input/action on your part;
There is the lesson learned issue - a debtor who is not pursued is unlikely to prioritise the debt now or in the future. Once pursued though (and in our vast experience) you will rarely see the same property owner fall into arrears again;
There is the messiness issue - the older the debt the less available information or recollection of relevant material to prove the debt will be and thus the more likely the claim may wholly or partially fail. In property management particularly, there is the additional issue under this heading that a LL/RTM/RMC will change managing agents periodically and former agents are not all always good at passing to new agents, or retaining themselves, the information required to pursue the historic debt;
There is the wrong person issue - particularly relevant to property related debts is the simple fact that people sell and move away. If not dealt with properly at the time, the ability to pursue the debtor can simply be lost even if action is taken well within the limitation period - see our article here on the often misunderstood point that new owners do not inherit the debts of the previous owners. See also here and here guidance on what to do if a property owner with a debt (or other breach) is seeking to sell or you are notified that they have sold. This is really important stuff to be aware of as your conduct at the time can adversely affect the ability to recover the debt.
Whilst it is wise to be aware of and alive to the limitation periods that apply to demands and then to pursuing demanded debts, it is probably more important to be aware of the ability to pursue debts promptly and not to be afraid of enforcing. In most cases the cost of the recovery process will ultimately be paid by the debtor.
The key is to be quick to obtain quality advice before time and the problems that can arise from that become an issue against which you are having to act.
For more information, please feel free to contact a member of the team on 01435 897297 or firstname.lastname@example.org.
This Legal Update describes the position in law as at the date of this article and care should be taken to note any subsequent amendments to the position as set out above. The Legal Update is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of KDL Law or by KDL Law as a whole.
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