Service Charge Recovery & COVID-19

Legal Director Phil Parkinson provides advice on the importance of taking a balanced & pragmatic approach to residential service charge recoveries during the COVID-19 crisis.

During this challenging period, it can be difficult to get a clear picture on the best way forward. Many landlords and managing agents are seeking clarification on the matter of service charge recovery and the provision of services under the current conditions. Many report having recently received or heard a lot of information about the need to comprehensively change the way they work.

Some advice being provided across the sector is placing heavy emphasis on managing agents negotiating payment holidays, arranging deferred payment plans or reducing the provision of services almost as a default position. Although commendable in anticipating some of the operational challenges faced, and appreciating that clear, frequent and empathetic communications are a given with lessees in extenuating circumstances, we would caution that setting up entirely new processes, systems and arrangements should be made to accommodate what may likely be a small proportion of instances that require further action.

In supporting this view, we would repeat the broad consensus on the practical actions that can continue to be undertaken:

• Service charges can still, and are being recovered now
• Claims can still be made online and default judgments obtained
• Credit control and recovery processes are continuing as is correspondence with lenders and leaseholders
• Applications and Appeals can still be lodged electronically and matters set up for later enforcement beyond the standstill of the Courts and Tribunals

The reasons for maintaining continuity as far as possible will benefit landlords, managing agents and leaseholders in the long term. Primarily, this will ensure services can still be provided and developments can continue to be well run, safely and securely.

In our experience, the majority of service charge recoveries will not require actions such as deferment, discount or appeal. Broadly establishing new credit control measures, agreements, materials and resources – along with an administrative framework - could be impractical, disruptive, costly and potentially contentious later. It would be prudent to consider these changes as the exception, not the rule.

Continuing normal recovery functions (as far as possible) also manages expectations and provides clarity for all parties as to their ongoing obligations under the lease. Unpaid service charges may be considered as a breach of lease and given the uncertain duration of the crisis, continued recovery mitigates the cumulative build up and compression of debt arrears, supporting both business continuity and the continued provision of services under the service charge. However, it would also be advisable that leases are carefully reviewed to gauge the level of obligation in providing services (or conversely the scope for service reductions) whilst service charge is in arrears, as in the longer term disrepair and such works may cost more in the long-term if left unmanaged due to low funds.

In some instances, revised service charge budgets may need to be considered as a matter of urgency, given the need to ensure escalating and additional cleaning costs can be met. Additionally, checking the lease to see if the use of the reserve fund, under the service charge, can be deployed as a contingency would be advisable. It should be remembered that landlords are still under a legal obligation to keep their property in repair and ensure any necessary inspections of the property are performed (but which must also be safely balanced against the risk of the infection or spread of the coronavirus). If there are insufficient funds from lack of service charge recovery, landlords may potentially be opening themselves up to being sued, or having to provide a loan to the service charge account creating further liability.

As matters stand, preserving continuity may be key. Changes should be balanced and proportionate to anticipated need. We are all in a period of uncertainty. Preserving stability - where we can - in our lives, routines and work, will be a foundation that helps carry us through.