Repossession for Arrears of Service Charges or Ground Rent

In some circumstances the owner of a leasehold property could face repossession due to a failure to pay service charges or ground rent.

Service Charges

Depending on the type of property covered by a lease, service charges may be payable by the leaseholder. Usually leaseholders of flats or of property on a managed estate will have to pay service charges to the freeholder or a management company. These service charges go towards the day-to-day upkeep of the development and may also be put towards a reserve fund to cover any major and / or unplanned works that need to be done.

The lease should set out how the service charges are calculated, what they cover and when they have to be paid.

Ground Rent

Most residential leases include a provision that the leaseholder must pay ground rent to the freeholder. Ground rent is often a low, or even nominal, annual fee. The lease should set out how much has to be paid for ground rent, when it has to be paid and to whom it should be paid.

Repossession - Forfeiture of a Lease

One of the ways a freeholder may use to enforce the payment of ground rent and / or service charges is by applying for forfeiture of the lease. Forfeiture is the process by which a freeholder ends a long lease because of breaches by the leaseholder. The freeholder must follow a fairly complex legal process before a lease can be forfeited. This process gives the leaseholder the opportunity to pay the outstanding rent or service charges in order to avoid the lease being forfeited.

Where a formal demand has been made for arrears of ground rent and / or service charges and the leaseholder has been in arrears for a long time, the freeholder may be entitled to start legal proceedings for forfeiture of the lease. If a court order for forfeiture of the lease is obtained, and the leaseholder fails to satisfy the conditions within it, the freeholder will be entitled to repossess the property from the leaseholder once the period stated in the court order has expired.

Avoiding Repossession - Relief from Forfeiture

A court order for forfeiture of a lease will almost inevitably allow the leaseholder the opportunity to correct the breach of the lease that has lead to the forfeiture proceedings. Avoiding forfeiture by remedying the breach is known as relief from forfeiture. A forfeiture order based on ground rent or service charge arrears will generally give the leaseholder at least 28 days to pay the outstanding sums and avoid forfeiture.

If the debt is paid the freeholder will not be entitled to forfeit the lease. However, if the case has got as far as a court hearing, the leaseholder will almost certainly be expected to pay the freeholder’s legal costs of bringing the case.

Involvement of a Mortgage Lender

If leasehold property has a mortgage secured on it the freeholder is likely to alert the mortgage lender to the forfeiture proceedings. A mortgage lender will want to avoid forfeiture of the lease so as to protect their interest in the property.

Mortgage lenders will often pay any unpaid ground rent or service charges to prevent forfeiture taking place. However, this does not mean that the leaseholder avoids having to pay the outstanding debt. The mortgage lender will almost certainly add the service charges and ground rent to the borrower’s account as arrears. Depending on the level of this debt the mortgage lender may then start repossession proceedings of their own based on mortgage arrears – even if the borrower is completely up-to-date with their mortgage payments.

Alternatives to Forfeiture

Forfeiture is a lengthy process. For this reason many freeholders may decide to use alternative methods of enforcing a debt based on ground rent or service charges arrears. The most straightforward way of doing this is by issuing a money claim for the amount of the debt.

Most leaseholders will have no defence against a claim for arrears of service charges or ground rent. It is, therefore, likely that a county court judgment will be successfully obtained if the debt is not paid in advance. Further, when a county court judgment is made for arrears of ground rent or service charges it is unlikely that the court will allow the leaseholder to pay the debt by instalments. This is because ground rent and services charges continue to accrue and it would be unfair on other residents if the leaseholder was allowed to defer payment.