Is my landlord entitled to delay applying a credit to my service charge account because other residents are in arrears?

Reader’s E-mail:

The managing agent of my leasehold flat is claiming that because one of the other leaseholders haven’t paid their service charge she cannot credit my overpayment from last period to this period’s invoice. The apportionment % is clear in my lease agreement therefore am I correct that it is the managing agent’s job to collect arrears and the other leaseholders don’t have a joint and several liability?

Reply from Service Charge Dispute Guide

1. Landlords have a general legal obligation under Section 19 (2) of the Landlord and Tenant Act 1985 to take action in respect of any overpayment of a service charge. Section 19 (2) states:

Where a service charge is payable before the relevant costs are incurred, no greater amount than is reasonable is so payable, and after the relevant costs have been incurred any necessary adjustment shall be made by repayment, reduction or subsequent charges or otherwise.

2. The precise requirements which a landlord must follow in respect of overpayments of a service charge will be those stated in the relevant leases. You and your fellow residents therefore need to carefully read your leases in order to determine what should happen in respect of any credits.

3. Your landlord, or the managing agent on their behalf, is contractually obliged to follow the terms of the relevant leases.

4. The only circumstances under which the landlord/agent could legally refuse to apply a credit would be if the leases in question clearly state that credits do not need to be applied if other residents do not pay their service charge. We have never seen a lease which such a provision and we think it likely that your landlord, by virtue of the actions of their agent, is in breach of the terms of your lease by refusing to apply the credit in these circumstances.

5. The more difficult issue is determining the best course of action for you to resolve this problem.

6. Assuming that your landlord is in breach of the terms of your lease you could take action against them either by making a claim in the County Court or making an application to a First Tier Tribunal. However, it is not necessarily in your best interests to do so.

7. The problem with taking any such action is that even if you are successful you may find yourself liable for your landlord’s legal costs, and possibly the costs of taking action in the first place.

8. Whilst both the County Court and the First Tier Tribunal have the power to order that you are reimbursed your Court or Application fees, along with an order under Section 20C of the Landlord and Tenant Act 1985 that the landlord does not attempt to charge you their legal costs as a service, there is the possibility that your landlord may be legally entitled to bill you for their legal costs as an ‘administration fee’ even if they lose the case made against them.

9. Many leases contain wording which permits a landlord to charge leaseholders their legal costs as a separate ‘administration fee’.

10. In the case of Freeholders of 69 Marina v Oram and Ghoorun [2011] EWCA Civ 1258​ the Court of Appeal decided that even if a lease is not explicit on this point, if it contains wording (as many leases do) that permits a landlord to recover costs associated with the issuing of a notice for forfeiture under Section 146 of the Law of Property Act 1925 that is to be interpreted as permitting a landlord to recover any legal costs associated with the resolution of a dispute under a lease.

11. Legal costs aside, there is a second issue involved in your situation. If other residents do not pay their service charges it may result in short fall in the funding of services and works at your property.

12. Clearly, this matter cannot simply be left as it is. It is likely that you are entitled to the benefit of the credit on your account and it is not option that your landlord, or the agent on their behalf, simply denies you that benefit because they have been unable to collect payment from other residents.

13. The best result which you could achieve in these circumstances is to reach an agreement with the agent as to when and how you will eventually receive any credit which are owed.

14. With this objective in mind we suggest that you carefully read your lease, and make reference to what it says in a strongly worded letter threatening legal action. In the interests of reaching a satisfactory agreement with the agent/landlord it would be wise for you to make it clear that you understand the issue regarding the funding of services and that you would accept a delay in repayment of the credit so long as you received assurances that timely action was being taken to collect the arrears and that you would receive a direct refund of the credit as soon as this was achieved.

15. If your agent/landlord does not agree to such a proposal then unfortunately the only course of action left to you would be litigation, with all the risks that entails.

Click on the link to read more Reader’s Questions and Answers on Billing and Refunds