A Landlord, Management Company (“RMC”) or RTM Company (“RTM) in the process of recovering arrears of service charge from a leaseholder may be asked by the defaulting leaseholder to enter into an agreement for settlement of the debt by way of a payment plan, i.e. payment of regular instalments (usually on a monthly basis) against the debt until it is settled in full.  In this update we consider:-  

• Under what circumstances agreeing to offers of payment plans from leaseholders should be considered or, perhaps, rejected;

• How such an arrangement should be formalised; and

• What terms should be included in the agreement in order to protect the position of the Landlord/RMC/RTM.

Lease obligations prevail

The first point to be aware of, prior to discussing a payment plan, is that the leaseholder is bound by the terms of the lease and the payment obligations and timetables set out therein.  

Accordingly, the Landlord/RMC/RTM are under no obligation to accept an arrangement for payment that does not accord with what the lease says, irrespective of how convenient an alternative arrangement might be for the defaulting leaseholder.  The terms of the lease were brought to the attention of the leaseholder by their conveyancing solicitor on purchase and so they should be fully aware of how and when they are required to pay their service charges.  They are, in any event, deemed to be aware of that liability, irrespective of the actual position.

Practicality

Notwithstanding the above, it may, or may not, be commercially sensible/practical for the Landlord/RMC/RTM to consider agreeing to a plan for payment of arrears by instalments.  If the leaseholder genuinely cannot afford to pay the total outstanding sum straightaway it can often be more cost effective for the Landlord/RMC/RTM to accept instalment payments over a short period of time as against incurring costs in taking the leaseholder through the court process. 

Reasonableness

Further, if a Landlord/RMC/RTM is in the process of recovering arrears from a leaseholder, it is important to conduct that action reasonably in order to protect their position in any (subsequent) Court proceedings.  The Court may take a dim view were the Landlord/RMC/RTM to reject out of hand an offer for an arrangement which the court deems to be reasonable in the context of the claim.  Therefore, wherever a leaseholder offers to pay by instalments, the Landlord/RMC/RTM should always give serious consideration to the payment plan terms being offered.

That said, as mentioned above, a Landlord/RMC/RTM is not obliged to accept a payment plan offer from the leaseholder.  If the proposal made is impractical for the Landlord/RMC/RTM or if the defaulting leaseholder has agreed and failed to comply with such arrangements in the past, or there is some other reason, then it may be entirely reasonable for the Landlord/RMC/RTM to reject the offer.  There is always the option to make a counter-proposal based on timescales and terms that are more practical/relevant/reasonable/affordable to the Landlord/RMC/RTM and the prevailing circumstances of the development.

Matters to take into account when considering a payment plan proposal

There is always a need to consider the following.

1. Affordability

   Will the payment arrangement proposed leave the Landlord/RMC/RTM with enough funds at the relevant periods in the year to cover all the expenses that are to fall due?

2. The amount of the instalments and the time period of the payment plan

   Will smaller payments help or hinder the management of the property? 

3. Which expenses should be included in the payment plan?

   For example, can a major works cost (often the cause for the need for payment arrangements) be collected by instalments or is that needed right away to enable works to proceed. Will there be enough money in the bank to appoint and pay contractors at the relevant time?

4. Should interest accrue on the sum included within any plan?

   Should the leaseholder be asked to pay interest and, importantly, does the lease provide for such a liability?

5. Are there any (better) alternatives?

   Where the leaseholder cannot pay and the instalments proposed are not acceptable for whatever reason, the leaseholder could invite their mortgage lender to pay on their behalf in order to avoid litigation.

The absolute requirement to formalise the terms of any agreement

If, having considered all of the above, it is decided to proceed with a payment plan, we strongly advise that that agreement should include, as a minimum, the following:-

• The agreement must be in writing and set out what is due and when instalment payments are to be made;

• It should include an admission by the leaseholder that the full sum of the payment plan is due and payable by them.  This will prevent the leaseholder from later disputing the charges and negates the need for the Landlord/RMC/RTM to obtain a determination of that sum in the Court or Tribunal should  the leaseholder fail to pay all or any part of the charges included in the payment plan;

• As accepting payment of the debt by instalments may affect the Landlord’s right to forfeit the lease, the agreement should set out clearly that the instalments paid under the agreement will be held in suspense until the last instalment is paid and only then accepted.  Such a term should preserve the Landlord’s right of forfeiture in respect of the sums in the payment plan should the leaseholder fail to complete the arrangement;

• The agreement must be signed by the leaseholder (in order for the admission in the second point above to be effective); and

• The agreement should include an explanation of what will happen if the leaseholder breaches the terms of the agreement. 

Conclusion

Payment plans can be a useful method of recovering arrears of service charge and can be of benefit to both parties in avoiding the need for lengthy and expensive litigation.  However, it is important to ensure that, when deciding to accept a payment plan, consideration has been given to whether there is a need or practical advantage (or disadvantage) in doing so and thus whether such an arrangement should be agreed.  If one is to be agreed it absolutely should be subject to clear terms confirmed in writing and signed by the leaseholder.

We advise clients daily on settlement arrangements in relation to all aspects of residential leasehold property and estates and would be happy to advise on disputes and how best to conclude them, whether they relate solely to the recovery of unpaid funds or more complex issues.

If you have any questions or would like any further information on this week’s Legal Update, please contact a member of the team on 01435 897297 or info@kdllaw.com.

Disclaimer

This Legal Update describes the position in law as at the date of this article and care should be taken to note any subsequent amendments to the position as set out above.  The Legal Update is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of KDL Law or by KDL Law as a whole.

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