Service Charge Arrears - Can and should you take steps to recover unpaid charges in light of Coronavirus? - An update.
27th March 2020
27th March 2020
We set out in our last Legal Update (which can be viewed here) our thoughts on the proposed legislative changes and whether these affected how you, as Landlords, Management Companies and Managing Agents, manage the funding of your developments and specifically whether you were prevented from recovering service charges due now, amidst the mess that is the result of the worldwide COVID-19 pandemic. The conclusion in that update was that no changes to how you would deal with that were expected in the legislation.
Well, the legislation, the Coronavirus Act 2020, is now in force and, as we expected, it provides very little protection for owners of property subject to payment of service charges. What this means for Landlords and Management Companies is that you are able to recover now, service charges that should have been paid and which are required to run your developments.
For those who wish to consider the specifics of the Coronavirus Act 2020, the relevant sections are:
s.81 - Residential Tenancies: Protection from Eviction; and
Schedule 29 - Residential tenancies in England and Wales - Protection from eviction
From a management perspective, this is great news as it will enable you to run and conclude your internal debt recovery processes to ensure that those due to pay are provided with every opportunity to pay. At the conclusion of that, should there still be some who have not paid, then you are entirely entitled to instruct external providers to progress action for recovery of unpaid charges.
The following are questions that we have been asked numerous times over the past few weeks:
Is it not the case that property owners are exempted from having to pay service charge for at least three months?
No, this is a myth/misunderstanding of comments relating to tenancies/mortgages and has no relevance or application to those liable to pay service charges.
Given the current circumstances, should I discount or allow a deferment of charges?
The short answer to both questions is a resounding ‘No’.
In relation to discounts, it will be the case in most developments that you could not apply a discount even if you wanted to as you have no resources to cover the resulting shortfall. You could not charge that shortfall to other property owners or use service charge monies to cover it (as that amounts to the same thing) and thus any discount would have to be funded by the Landlord from its own funds.
In respect of potential agreements to defer payments, I direct you to the suggestions made in the Legal Update from earlier this week. The answer is that you could agree arrangements where, in your opinion, it is the right thing to do in the circumstances of each specific case, but be careful. Our advice is that your starting point should be NOT to agree a deferment and to only get into a further discussion on that subject if, in your opinion, the individual property owner absolutely needs it.
Do read the Legal Update from earlier this week (copy attached) and the recommendations made to listen, act accordingly based upon your own assessment of a property owner’s needs, and do be open to agreements to defer or take instalments where you believe that is the only sensible course of action. However, avoid having as your opening gambit, a willingness to strike a deal as most residents will not NEED to pay that way.
I thought the Courts were closed - how then can you enforce?
Again, another myth/misunderstanding. The courts are very much open, running and, importantly, they continue to process debt claims. The First Tier Tribunal (“FTT”) is not progressing matters at this stage but the vast majority of claims for service charge debts will not get anywhere near the FTT in any event; most being concluded within the County Court.
If, following issue of proceedings in the County Court, a matter were to become defended and possibly transferred to the FTT, then, yes, that matter would grind to a halt for a short period. However, less than 5% of cases that we handle for clients are defended and, of those, only some are transferred to the FTT. Accordingly, most cases will conclude without being affected by the current lockdown.
If the owner has lost their job and has no money, how can they possibly pay if we do pursue them?
The vast majority of service charge arrears cases (undertaken by this firm) result either in the property owner making payment themselves or their mortgagee making payment on their behalf. If a property owner is unable or unwilling to pay and owns the property subject to a mortgage, then the mortgagee will make payment once the charges have been determined.
That determination is obtained either through a Court judgment or, far more cheaply for the paying owner, through an admission of the debt. It is therefore possible, even now, to proceed with a matter to the point where the mortgagee can and will often make payment with little debate. If the property owner is communicative and willing to minimise their liability for costs then this process can be concluded swiftly and without the need for the owner to have a Court judgment made against them.
Are Mortgagees still working and making payments?
This is the inevitable question arising from the above to which the answer is - yes - mortgagees are continuing to process payments and we continue to speak to them daily.
Surely, the Court will not let you forfeit a lease at the moment - so what’s the point?
In fact, that is partly correct. The Judiciary have elected not to allow any more possession claims to be processed as of today (27 March 2020). However, there are two points worthy of note as, in reality, this recent position of the Courts does not need to affect your ability to recover right now any charges due:
Less than 1% of cases for non-payment of ground rents or service charges that this firm handles reach the stage of needing to issue a claim for (possession) forfeiture. Almost all cases are settled by the owner or their mortgagee long before that stage is reached.
Additionally, because the Landlord must first obtain a determination and serve a notice on the owner before issuing a forfeiture claim, the reality is that any arrears case started now would be unlikely to reach the point of forfeiture much before September 2020 in any event. By that time, we are all hopeful that this episode will have run its course and we will all be back to our normal lives, so the stay on possession proceedings will have no effect.
Will the cost of pursuing recovery action now be any higher?
No. The process is the same.
Is there really any harm in delaying any enforcement until after this pandemic has passed?
The answer here is ‘potentially quite a significant one in the case of most developments’, but that is a question only the Landlord or Management Company can answer.
Given that it cannot be known for sure when the current position will change back to how we all ran our lives before, the question really needs to be, how long is the Landlord or Management Company able to run the development if it is receiving no or only some of the monies it has demanded? Most developments absolutely require all or most owners to pay in full and on time which is why most well run developments will have clear recovery processes in place to ensure that there are no sizeable arrears.
You should also consider that if enforcement steps are delayed until only after this crisis is over, it will take, in most cases, at least 3 - 9 months to actually recover the monies owed (and that takes no account of how slow the court may well be at that stage with the inevitable glut of cases all coming in at the same time) . If we really are only returning to normality toward the end of Summer 2020 (and of course it may be later - who knows?) how long can the Landlord/Management Company carry the debt and still provide all of the services it is contractually obliged to provide?
All of us must accept that this is a tough and unprecedented period of time and some of the decisions to be made by Landlords, Management Companies and Managing Agents will be equally tough. However, you/your clients need to weigh up carefully the continuing contractual obligations that they have to the property owners and residents and be clear how they are to fund those. If the development is flush with cash then you may take a different view on that development than you would on one that runs tightly from month to month or quarter to quarter. However, because no one is able to say when this current position will end, even that approach is also not without risks.
The advice has to be that you change nothing and, if enforcement is required, then you enforce and you do not delay just because the world looks a little different at the moment.
We are always here if you wish to run a case or scenario by us and whilst we are working remotely, our service and response times are unchanged.
For more information, please contact Kevin Lever at Kevin.Lever@kdllaw.com or on 01435 897297.
This 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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