Well, here we all are, three months into lockdown and, with some clear relief, the slow release from isolation seems to be coming our way - and just in time for the summer too. What could be better?
Given that lockdown started shortly before the March Quarter Day and we have just passed the June Quarter Day, it is interesting to see two things. Firstly, that the Government has extended the moratorium on evictions to protect commercial property tenants and tenants of rented residential property. Secondly, we hear from agents that we have spoken to over the last three month that, in the main, residential property owners are generally compliant with service charge payments.
Given that two Quarter Days have now passed and, despite the starting of a release from lockdown, financial normality is itself far from just around the corner, it is timely to consider the position in relation to those few property owners who are not paying their liability, either by instalments or perhaps at all. Below is an updated reminder of the information provided in March of this year and answers to popular questions in relation to the important issue of - Can you and should you start to pursue service charge arrears now?
The following are questions that we have been asked:
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Are property owners exempt from paying service charge for at least three months?
No, this is a misunderstanding of comments relating to tenancies/mortgages and has no application to service charges. Indeed there is no statutory protection in place for those responsible for the payment of service or estate charges suggesting the government correctly view that such charges are just contractual debts that property owners must pay in order to ensure that the development is maintained notwithstanding the pandemic.
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Given the current circumstances, should I discount or allow a deferment of charges?
Discounts - In most developments 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). Any discount would have to be funded by the Landlord from its own funds.
Agreements to defer payments - You could agree arrangements where, in your opinion, it is right in each specific case, but be careful. Our advice is that your starting point should be NOT to agree a deferment but only get into discussion on that subject if, in your opinion, the individual property owner absolutely needs it. Our recommendation is to listen, act accordingly based upon your own assessment of a property owner’s needs, be open to agreements to defer or take instalments where you believe that is the only sensible course of action. However, avoid an immediate willingness to strike a deal as most residents will not NEED a deferment.
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If the owner has lost their job and has no money, how can they possibly pay?
The vast majority of arrears cases result either with the property owner making payment themselves or via their mortgagee. 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 due have been determined - see question 4 below.
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 will make payment. 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 a Court judgment.
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Are Mortgagees still working and making payments?
Yes, we are receiving payments on a daily basis from mortgagees settling their customer’s arrears.
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If the Courts are closed - how can you enforce?
The courts are not closed. They are in fact open, running and, importantly, they continue to process debt claims. The First Tier Tribunal (“FTT”) is now starting to progress both new matters and ones that were previously on hold, but the vast majority of claims for arrears will not reach the FTT in any event; most being concluded within the County Court or prior to the issue of proceedings.
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Surely, the Court will not let you forfeit a lease at the moment - so what’s the point?
At the start of lockdown the Courts and Tribunal Service implemented Practice Direction 51Z of the Civil Procedure Rules which, from 27 March 2020, stayed all possession claims for an initial period of 90 days with a further extension now until 23 August 2020. In reality, this change will not affect your ability to recover as only a tiny percentage of arrears cases reach the issue of a claim for (possession) forfeiture. Almost all cases are settled by the owner or their mortgagee long before that stage is reached.
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Is there any harm in delaying any enforcement until after this pandemic has passed?
Yes, potentially quite a significant one in the case of most developments. Given that it cannot be known for sure when the current COV-19 position will end, or the financial after effects of it, the question really needs to be, how long is the Landlord or Management Company able to run the development if it receives no or only some of the monies it has demanded? Most developments 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 three months to recover monies owed (and that takes no account of how slow the Courts may well be at that stage). If we really are only returning to normality toward the end of summer 2020 (and of course it may be much later than that), how long can the Landlord/Management Company of your developments carry the debts and still provide all of the services it is contractually obliged to provide?
We must accept that this is an unprecedented period of time and some of the decisions to be made by those who manage developments will be tough. However, you/your clients need to weigh up carefully the continuing contractual obligations owed to the property owners and residents and be clear how they are to fund that. If the development has healthy reserves then you may take a different view than you would on one that runs with tighter funds. However, because no one is able to say when this current position will end, even that approach is not without risks.
Our advice is to change nothing. If enforcement is required, then you should enforce; do not delay just because the world looks a little different at the moment.
Should you have any questions in relation to the above, then please do not hesitate to contact Kevin Lever on kevin@kdllaw.com or any of the Specialist Enforcement team at KDL Law
