All your plans for keeping the building up to the standard residents want, and making budgeting for major repairs easier for everyone, can start to fall apart if people fall into arrears with service charges.
It’s never an easy matter to deal with: there may be ‘can’t pays’, with genuine financial crises, and even some ‘won’t pays’, made up of the awkward brigade who never really understood their obligations as leaseholders, as well as people who have a genuine objection to the charges and how their money is being spent.
As with most things in life, the answer will probably be found in good communication, but it also needs to be accurate communication.
You’ll need to make yourself aware of the law on service charge demands and people’s rights to challenge them. Following the correct procedures to the letter might seem a bit stuffy in a small block where you all know each other well, but it can avoid problems in the future.
Service charges typically cover maintenance, repair and renewal of communal items and areas, as well as insurance and any administrative and building management costs.
What is included should be set out in the leases that each flat owner will have agreed when they signed the lease, so do make sure you are familiar with the leases before you plan the year ahead.
The costs that leaseholders will be sharing should be set out in a budget at the start of each year, and split into day-to-day costs and reserve/sinking funds1 .
Of course there may be un expected issues and surprises, and you will in any case have to produce a final set of accounts at the end of the year). And remember, sharing the predicted budget is a legal requirement, and will help residents to budget for the year ahead.
When it’s time to circulate invoices, do make sure your service charge demands are correctly presented and delivered.
The free Leasehold Advisory Service is a great source of information. For instance, The Landlord & Tenant Act is very specific about how service charges must be demanded2.
What if you’ve done everything correctly and still some people won’t pay?
First and foremost, act quickly. Service charge arrears and lack of funds may quickly translate into reduced levels of general maintenance and service and delays in bigger maintenance projects.
That might mean unhappy residents, and even a drop in the market value of their homes. They could even sue you for such losses if it was felt that you, or other directors of the residents management company (RMC), were to blame for poor management of the service demand budget and process, intentionally or otherwise. It’s why many RMCs take out Directors and Officers Liability Insurance alongside their Deacon buildings insurance for flats.
If payment is not received on time, send a polite reminder to the leaseholder. If that is ignored, then you can warn them about the possibility of legal proceedings.
You can also penalize people with late payment administration charges when appropriate. The law says charges should be ‘reasonable’ but your lease may be more specific eg X% above base rate.
Most modern leases also allow you to recover solicitors’ costs from a leaseholder, and if the case isn’t disputed (not least because you have followed all the demand procedures to the letter), the late payer can be asked to pay the solicitor direct. Some solicitors, who will manage the whole process for you, will most likely recover fees direct.
What if there is a good reason for nonpayment?
There may be a good reason for delayed payment: the property is only just changing hands, someone has died and probate is yet to be granted, or maybe someone has lost their job and is in the financial doldrums.
In such cases you may prefer to allow a small delay, accept instalments or even agree a one-off concessionary reduction. Do however check that your lease allows you this sort of flexibility.
What if someone challenges their service charge bill?
Leaseholders have a right to challenge any demand if they think it is unreasonable or if they think it does not comply with the lease.
The process can be long: the complainant is entitled to a written summary of costs incurred in the last accounting year; and then has a further six months to ask for sight of accounts and receipts.
If they are still disputing costs, you might find yourself before the First Tier tribunal. At this stage, assuming all your records are fair and in order, resolution is likely to be swift, but you’ve still lost a lot of time!
Where to go for help
At the end of the day, your main concern is running the block efficiently and, if you’re a volunteer RMC director, you probably have no appetite for getting involved in chasing up arrears.
Getting the budget as accurate as possible and making sure the service charge demands are issued properly, with the right accompanying information delivered at the right time, is the best way to help avoid problems.
The law is quite complicated, but the Leasehold Advisory Service3 offers comprehensive free guidance to get you on the right track.
The sole purpose of this article is to provide guidance on the issues covered. This article is not intended to give legal advice, and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. We make no claims as to the completeness or accuracy of the information contained herein or in the links which were live at the date of publication. You should not act upon (or should refrain from acting upon) information in this publication without first seeking specific legal and/or specialist advice. Arthur J. Gallagher Insurance Brokers Limited trading as Deacon accepts no liability for any inaccuracy, omission or mistake in this publication, nor will we be responsible for any loss which may be suffered as a result of any person relying on the information contained herein.