Service Charge Payments – Bankruptcy of Managing Agent

When purchasing a flat in a block, particularly where there are communal areas such as stairwells and landings, there will usually be a liability to pay service charges (also called maintenance charges). This is an annual payment (though it is often paid in quarterly or monthly instalments) and it is a contribution toward the upkeep of the communal parts of the building and any shared services such as lifts or a concierge. It is paid to the landlord or management company, often via a managing agent.

The amount of service charge will obviously vary from development to development depending on the number of flats and the size and nature of the communal areas/services. Some might be just a couple of hundred pounds a year where others might be a couple of thousand. Without provision to collect service charges many developments would fall into disrepair, but the need to pay them, particularly in difficult economic times, can lead to problems of its own.

Insolvency of the Management Company

The problems occur when the freehold of the block is owned by a management company, particularly one which is not owned by the tenants. The management company will usually have contracts with various businesses such as a managing agent, a maintenance company or a cleaning company as well as being responsible for electricity bills and any other utilities.

If a significant number of tenants fail default on their service charge payments this can leave the management company unable to settle its debt and force it into administration and eventually liquidation. This can be a major issue for other tenants in the block as it means that the building and grounds are unmanaged and worse, potentially uninsured. This can render all of the flats in the block unsaleable or at best less valuable.

Why is Management Company Insolvency on the Increase?

Instances of management companies becoming insolvent is on the increase. This is a side effect of the property boom, during which many people invested in buy to let property in the hope of getting rich quick, and the subsequent crash.

At one time, when most of the flats in a block would be owner occupied, it was unlikely that there would be more than one or two defaulters at a time. The finances of a well managed company should be robust enough to copy with this level of shortfall. Now however it is commonplace for a couple of investors to own most of the block between them. Should one or both go bankrupt that means most of the flats in the block are defaulting and the management company is unable to cope. Furthermore, an investor is much more likely to default than an owner occupier since he does not risk losing his home but merely an asset which is often worth less than the debt secured on it.

What Can Tenants Do if a Management Company Becomes Insolvent?

It can be distressing for the owners of flats in a block where the management company becomes insolvent but all is not lost. The first step is to acquire the freehold title of the block via a process called enfranchisement, or by approaching the Treasury Solicitor (in whom the assets of a dissolved company vest) to purchase the freehold. The advice of a solicitor specialising in landlord and tenant law should be sought.

Once the freehold is acquired the tenants who have acquired it become the landlord. The next step is to contact the mortgagees of the flats which have defaulted (if the flats are subject to mortgages) and give them notice of the arrears and of the fact that you intend to take steps to forfeit the lease if the arrears are not settled. Forfeiture is a process through which a freeholder can bring a tenant’s lease to a premature end and seize possession of a flat if there is a breach of the lease (such as non-payment of service charges) which is not remedied. The lender will usually settle the arrears on the borrower’s behalf as if the lease is forfeit, the lender will lose its security. As failure to pay service charges will also be a breach of the mortgage conditions the lender will normally commence possession proceedings.

Where the lender does not settle the arrears, or where there is no lender, the tenant should be threatened with forfeiture proceedings. The statutory requirements for successfully forfeiting a lease and legal advice should be sought. After forfeiture however, a new lease of the flat can be granted and the premium obtained (or part of it) can be used to settle the arrears due from the former tenant.

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