When seeking to recover arrears of service charge, the simplest method is to issue county court proceedings; in around 80% of cases, nothing further is needed. Once a county court judgment (CCJ) is obtained, the arrears are paid either by the defaulting tenant or, more usually, by their mortgage company. However, in cases where the tenant and/or their mortgagee fails to pay, the ultimate sanction is forfeiture.
Section 168 of the Commonhold and Leasehold Reform Act 2002 (“the 2002 Act”) provides that a landlord cannot serve a forfeiture notice or issue possession proceedings in respect of a tenant’s breach of covenant until a court or the leasehold valuation tribunal has determined that a breach occurred. Seeking this determination from the LVT can take a considerable amount of time and legal costs and it is a far simpler matter for landlords to obtain a county court judgement.
As part of the debt collection process, many landlords obtain default judgements against their tenants and later rely on them when seeking to forfeit the lease. This long standing practice was recently challenged in the case of Church Commissioners –v- Koyale Enterprises Thaleshwar [2012] 21 EG 96 where the judge at first instance determined that a default judgement was not a final determination and the relevant statutory provisions were therefore not satisfied.
The landlord appealed the decision and it was ruled that where a default judgement had been entered, the issues were to be treated as “determined” between the parties and treated as a final determination. In the appellate judge’s view, leaseholders still retain the ability to challenge the charges if they choose to do so. Leaseholders are able to make an application to set aside the judgement and the judge was concerned that requiring a formal hearing in circumstances where no defence had been filed would be unfair on landlords and only serve to increase their costs. It would also increase the already considerable pressure on the court.
Whilst this decision may have been influenced by the practical difficulties that would arise if a default judgement was not deemed to be a final determination, it does mean that landlords retain the relatively quick and user friendly system where the majority of claims are not defended. This case does not, of course, change the court’s traditional reluctance to forfeit a residential long lease where relatively modest service charges are considered against the total value of the leasehold interest.
