Can’t pay, won’t pay!

First, you should establish why the leaseholder will not pay the service charge. Is it that they can't pay due to financial reasons, or is it that they are unwilling to pay because the demand is not in accordance with regulations or the lease? Be prepared to have a frank conversation because each situation requires a different approach.

Check if the costs are actually recoverable

Service charge demands must be made in accordance with what is written on the lease. If your lease doesn't allow for your chosen expenditure to be recovered through the service charge, then your leaseholders have every right to refuse to pay. Always read the lease!

Comply with statutory restrictions

You must demand service charges in a contractually valid way. This includes sections 47 and 48 of the Landlord and Tenant Act 1985, which require the landlord's name and address to be given on any service charge demand. In England and Wales, demands must be accompanied by a legibly written or printed summary of the leaseholders' rights and obligations. In most cases, service charges will not have to be paid until corrections have been made.

Are the charges reasonable?

A leaseholder may choose not to pay because they believe the charges are too high. They may even take their grievance to the Tribunal. In this case, you should be prepared to produce accurate records of expenditures and the decisions you made regarding what to buy and the contractors you used. Show exactly where the money went and why you charged the value you did.

If the leaseholder is financially unable to pay

Some leaseholders will simply be unable to pay at this time due to financial stress. Consider agreeing on a payment plan that splits the arrears into smaller, more affordable instalments. If the leaseholder has a mortgage, they might ask their lender to settle the arrears on their behalf.

Avoid involving solicitors unless absolutely necessary

Legal action is always a last resort, and it is better to maintain as healthy a relationship with your leaseholders as possible. Try and settle any arrears amicably first and foremost. However, if your credit control processes and other methods of debt recovery have been exhausted, the next step is to have solicitors send a formal letter (an LBA or Letter Before Action) prior to County Court proceedings. These could result in a county court judgement being entered against the leaseholder.

Forfeiture 

If it is decided that the leaseholder has breached their lease, the landlord can choose to forfeit or end the lease early before it is due to expire. This is a serious action that should not be taken lightly. Section 146 of the Law of Property Act 1925 requires notice to be sent out before the lease can be forfeited. This should: 

1. Inform the leaseholder of their breach of lease
2. Give the leaseholder a reasonable to remedy the breach (where the breach is capable of being remedied)
3. Require the leaseholder to pay compensation for the breach

Waiving the right to forfeit

The landlord cannot forfeit if they do anything that confirms the continued existence of the lease to the leaseholder despite the breach. This could include:

• Accepting payments of service charges or ground rent

• Sending further service charge or ground rent demands

If the right to forfeit has been lost for the brief in question, it can only arise again if another breach occurs.

For a complete guide to service charge arrears, download our free Block Manager's Guide: Service Charge Arrears. Written with leasehold solicitor Cassandra Zanelli, CEO of Property Management Legal Services, we comprehensively cover the entire service charge process, allowing you to take on any issues with confidence.

Stuart Armstrong, Senior Copywriter at Fixflo, the market-leading repairs and maintenance management software