When acting for an RMC or Right to Manage Company, managing agents will often be told by the freeholder to allow them to deal with the service charge arrears. The benefits of such an approach are clear from the ground rent owner’s perspective, but is it in the best interests of the management company, the leaseholders and the block?
With ground rent recovery increasingly in the spotlight, both managing agents and freeholders must take care to ensure recovery procedures are legal, in line with the terms of the lease and – importantly - in the best interests of the RMC and leaseholders.
When assessing whether or not to allow service charge arrears to be transferred over to the freeholder and/or its advisers, we recommend taking into account the following five factors:
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To whom is the service charge payable?
Read the lease: who has the benefit of the service charge clause? Sometime it is the management company, sometimes it is the freeholder and, occasionally, it is both.
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Who is legally entitled to bring a service charge claim?
It cannot always be assumed it is the freeholder. Where the RMC has the sole right to claim service charges under the lease, the freeholder will not be legally entitled to do so and vice versa. Where the lease states that the service charge is payable to both the landlord and the RMC, there is a choice in who collects the service charge. Where the RMC has the right to demand – and recover – the service charge arrears, combining these arrears with the ground rent can cause problems for a managing agent tasked with collecting service charge arrears as effectively possible.
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Who issued the service charge invoices?
In practice, the freeholder has often had no dealings with the service charge collection, and has not issued any service charge demands. The cause of action therefore lies with the managing agent on behalf of the RMC and the managing agent is not legally obliged to instruct the freeholder’s legal team to recover the arrears.
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What are the forfeiture provisions?
Whilst freeholders often have the sole right to forfeit the lease, this is not always the case. Some modern leases allow the RMC to forfeit in the event of a breach.
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Who has the reversionary interest?
To state the obvious, the freeholder is the company or individual with the legal title of the freehold. The reversionary interest entitles the owner of that interest to the leasehold title on forfeiture. Less obviously, the reversionary interest does not always belong to the freeholder. A typical example of a “hidden” reversionary interest is a head lease. Head leases are often created where an RMC takes the freehold from a developer once the development is completed.
Before combining service charge and ground rent arrears, all relevant points should be considered. From a managing agent perspective, you need to take care that you are acting in the best interests of your client.
Clare Brady, MD of Brady Solicitors
