This blog is about how to use the threat of costs to break the deadlock when the lessee has refused or neglected to pay the service charge in response to your normal demand and a couple of reminders.
The escalation letter we recommend below should not be used at the outset as it will not be necessary or appropriate until you are sure the lessee is trying to avoid payment for one reason or another.
Not all disputes will be right for escalation as the lessee may have exercised their right to dispute the reasonableness of the service charge in the First Tier Tribunal in accordance with the statement of rights and obligations that you must send with the original service charge demand.
Normally lessees pay their service charge demands but from time to time a lessee will not pay and will not exercise their rights to refer to the Tribunal. Sometimes it will be because you have not demanded the charge properly (see our checklist for avoiding errors in your demands), other times it will be because the lessee cannot or will not pay.
If the lessee cannot pay then you can ask their mortgagee to pay the demand. The mortgagee will only pay if you have a written admission from the lessee, a court Judgment or a Tribunal Decision that the charge is reasonable. Here is a template admission you can ask the lessee to sign. If you send this signed by the lessee we generally find that mortgagees will accept this and pay the arrears.
If the lessee will not pay and they continue to dispute their liability for, or the reasonableness of, the service charges demanded then we suggest that you use their potential liability for the legal costs as an incentive to make them pay.
Without the threat of some additional liability the argumentative lessee has no incentive to pay. Arguments rage on over weeks and months. The lessee is happy to string it out because it costs them nothing to argue and all the while they keep holding the money. The lessee is not feeling at any risk and is happy to hang onto the money when you keep demanding it.
When you write demanding payment by a certain date the lessee is bound to think – ‘Or what?’. This is where a clear explanation of their potential liability for costs comes in. The escalation letter should make very clear the answer to that unspoken ‘Or what?’ question. The escalation letter should make plain that the freeholder has the right to forfeit the lease and is entitled to all of its legal costs in preparation for or contemplation of serving a forfeiture notice under Section 146 of the Law of Property Act 1925. If the lease and management agreement allow you may also be able to recover your time as agent in dealing with this breach of the lease.
Here is a suggested escalation letter making clear the enormous risks the lessee now runs if they continue to withhold payment:
This type of letter is very effective because suddenly the whole dynamic changes. This is no longer a risk free debate about how the block is managed, who is on the board of the freehold or RTM company and personal disputes amongst the various leaseholders. The new dynamic is that in seeking to argue about a few hundred pounds the lessee now knows they are risking a few thousand pounds if they are wrong.
If the lessee does not have the sense to see this and back down then you can simply pass the matter on to us to recover. If you decide to use another solicitor make sure that solicitor enters into an agreement whereby they only get their costs if the lessee is found to be liable for them. We say that because there are a number of ways that the demand can fail and you do not want to be left with unrecoverable legal costs that may exceed the amount you wish to recover.
25 April 2016
Laura Albon has been working in litigation for nearly 10 years. She works almost exclusively with property investors and agents across the whole country. She trained with the partners of Helix Law and has extensive experience in possession, service charge recovery, breach of covenant and commercial contract claims. She is able to pursue matters through the court and through The First Tier Tribunal (formerly the Leasehold Valuation Tribunal or LVT).
This article is written to raise awareness of the issues it discusses and it may not be updated after it is first written, even if the law changes. It is not intended to be legal advice and cannot be relied on as such. Helix Law is not responsible or liable for any action taken or not taken as a result of this article. If you think the matters set out affect you and you wish to apply them to your particular circumstances then we are happy to give you free initial telephone advice.