In a residential lease, it is common for there to be a service charge provision which allows the landlord to recoup service charges for the management and maintenance of the building from the tenant. It is important for landlords to stay on top of managing their investment properties to prevent any financial losses. When a leaseholder does not pay or falls behind on their service charge payment it can have a detrimental impact on landlords and managing agents, particularly if there are a group of leaseholders not paying service charges on time. It can create problems relating to inefficient property management if the landlord or managing agent are unable to fund important maintenance works and services due to leaseholders defaulting on their service charge payments. After all, a landlord or managing agent are not a bank to give out loans to fund service charges for the benefit of leaseholders.
What are service charges?
Service charge costs mainly entails the cost of services to the building such as maintenance and repairs, lifts, central heating, building insurance, concierge services, and cleaning of communal and shared spaces.
Landlords generally pay for the services in the first instance and then recoup the cost of the services from tenants known as service charges.
The landlord also has discretion to charge costs associated to a managing agent in terms of letting and managing the tenancy towards the service charges.
The lease should outline the charges the landlord can reasonably ask the tenant to pay.
Landlords can only recoup services charges which are deemed reasonable. Tenants have the right to dispute a service charge if they believe it to be unreasonable, or the work was not completed to a satisfactory standard, or they believe they should not have been charged for a particular service.
What can I do if the tenant fails to pay service charges?
Non-payment of service charges is a serious allegation as it constitutes as a breach of a lease. If a leaseholder were to fall behind with service charge payments the landlord can ultimately terminate the lease.
In the first instance, it is advisable for the landlord to negotiate with the tenant to identify why they have not paid for service charges. If the tenant is struggling financially it may be worth getting into a payment plan or allowing time for the tenant to pay.
If the problem persists or the tenant refuses to pay for service charges then landlords should consider taking legal advice. Before commencing legal action, a pre-action protocol must be enforced by sending a letter before action stipulating a demand to the tenant to pay any outstanding service charges before a certain date. This puts the tenant on notice that if they still fail to pay the amount outstanding, legal proceedings will commence to seek recovery of unpaid service charges.
If during legal proceedings the tenant still fails to pay the outstanding service charges, the landlord can make a claim to County Court for a money judgement. Certain steps would need to be taken beforehand, before you can make a county court claim. You cannot directly raise a claim to the court. The court has the power to suspend proceedings and enforce fines if the appropriate civil procedure rules were not followed.
Alternatively, the landlord also has the option of forfeiting the lease as the tenant is effectively in breach of the lease as they have not fulfilled their obligation of paying service charges. To commence forfeiture proceedings, the landlord can either serve a section 146 notice under the Law and Property Act 1925 or a section 168 under the Commonhold and Leasehold Reform Act 2002 on the tenant outlining the grounds for the breach. Upon serving the section 146 notice, the tenant must be given reasonable time to pay the outstanding service charges. An application for forfeiture will only be considered by the court if the amount outstanding is in excess of £350. However, forfeiture should not be taken lightly as it is usually a difficult and costly process.
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