Invariably when we are instructed to enforce any breach by a leaseholder or freehold house owner (collectively in this Legal Update referred to as ‘property owner’), the managing agents appointed will have an associated administration fee (or a number of them) attached to that instruction. That may be for the work involved in sending reminder letters, for example chasing up unpaid charges as part of the agents’ internal debt recovery processes, or for the work in collating the relevant documents to provide the instruction to the solicitors. Of course, those fees are expected to be recovered as part of resolution of the matter, be that payment of the outstanding arrears or the remedy of any other breach. Whilst in the vast majority of cases those admin fees are recovered without issue, the question in any given case is whether or not those fees can lawfully be recovered.

Step 1 - Are the fees payable by the client?

Before any administration fees can be passed on to the property owner under the terms of the lease or transfer deed, the fees must be payable by the client (be that the freeholder, RMC or RTM company) in the first instance. No liability can be passed on to the property owner if the claimant party has no liability to pay such fees. This is because there is no contractual relationship between the property owner and the managing agents; the only contractual relationships are (1) as between the client and the managing agent (e.g. the management agreement), and then (2) as between the property owner and the client (e.g. the lease or transfer deed).

So, the agents’ management agreement with their clients must be clear on the circumstances in which they can render additional administration charges to their client, and how much. Any increases in those fees from time to time must be agreed with the client and clearly documented as an addendum to the main service agreement.

Step 2 - Are the fees payable by the defaulting property owner?

Once a contractual obligation for the client to pay the admin fees through the management agreement has been established, the client has the potential ability to pass those fees on to the defaulting property owner, through their contractual relationship. Whether or not the admin fees can lawfully be passed on depends on the terms of the lease or transfer deed, and what those agreements require the property owner to pay.

Rarely will a lease or freehold transfer contain such an express obligation on the defaulting property owner to pay managing agents’ admin fees. However, in most cases, the leases and freehold transfer will be widely drafted and may impose a general obligation on the property owner to pay “costs”. This type of covenant is typically relied upon to recover a client’s legal costs. However, this covenant can also extend to other costs and fees lawfully incurred by the client (e.g. where such fees are payable by the client under the management agreement), where the terms of the lease or freehold transfer allow. If the covenant is limited to an obligation to pay the client’s “legal or solicitors’” costs, a managing agents’ admin fees would NOT fall within this type of covenant and would NOT be recoverable. In the most part, however, such a covenant will be widely drafted and referred to “costs and fees”, including (but without limitation) solicitors’ and surveyors’ costs” (or words to that effect), in which case a managing agents’ admin fees are likely to be recoverable.

The terms of the lease or freehold transfer need to be checked carefully to ensure that the circumstances are such that the obligation to pay such fees under this type of covenant are triggered. For example, the lease or transfer may oblige the property owner to pay costs incurred by the client in enforcing any breach. Alternatively, the covenant will be more limited, to costs incurred in relation to or in contemplation of any proceedings or service of any notice under Section 146 of the Law of Property Act 1925 (e.g. forfeiture), where a lease is concerned. The agents need to be able to say that the work that has given rise to the admin fee satisfies those conditions, e.g. that the reminder letters and referral to the solicitors was in contemplation of forfeiture. In the most part, that will be easy enough. However, to be recoverable, no action should be taken which would “waive” the right of forfeiture. This is where matters become more complicated - see Step 3.

Step 3 - Have the fees been demanded?

Even if the client has a contractual liability to pay the admin fees and has the ability to pass that liability on to the defaulting property owner under the lease or freehold transfer, the admin fees are only lawfully due if they have been demanded from the property owner. Such demand must be accompanied with the relevant Section 158 Summary of Rights and Obligations (Administration Charges), for leaseholders. In relation to leasehold properties, agents will usually be advised NOT to formally demand such admin fees, before referring the particular action to solicitors for enforcement. The reason for this is that, technically, the demand for the admin fees will waive the right of forfeiture in relation to the substantive debt (the arrears) or other breach, accruing prior to the referral. Typically the agents’ admin fees will be under £350, e.g. the statutory threshold for forfeiture action. The effect of this is that the client may find themselves in a position where the right to forfeit for the substantive debt or other breach has been lost, as the demand for the admin fees waives the right of forfeiture for matters prior to that demand, and no new right of forfeiture arises (for non-payment of the admin fees) as the admin fee is under the statutory threshold for forfeiture (£350). Even where such admin fees have not been formally demanded, at KDL we will nonetheless seek to recover those charges for a managing agent referring the action, and in the overwhelming number of cases those fees are recovered. To ensure that the admin fees are lawfully due, agents should then issue a demand or statement for those charges, marked as paid, with the Section 158 Summary of Rights and Obligations (for leasehold properties), once the legal action has concluded.

Step 4 - Are the fees reasonable?

As a separate but important issue, agents need to bear in mind that their admin fees can be challenged under Section 19 of the Landlord and Property Act 1985, in relation to leasehold properties, so the fees must be reasonable. Where the reasonableness of the costs is challenged by a leaseholder, the shortfall of the costs above what the Tribunal determines as reasonable would nonetheless be payable by the client under the management agreement, although of course whether the agent would still look to the client (or the service charge) to pay that shortfall, is another matter.

Disclaimer

This 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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