What is a section 146 notice and how can it help with recovery of service charge debt?
Section 146 notices are served pursuant to s146 of the Law of Property Act 1925 (“LPA 1925”) and mark the first step in the forfeiture process.
These notices are served upon leaseholders when they are in breach of obligations contained in their lease. An example would be a leaseholder’s failure to pay a service charge which has been validly demanded.
Section 146 states that a landlord cannot exercise its right of forfeiture (otherwise known as “re-entry”) unless a section 146 notice has been validly served. This applies to most breaches, although there are a small number of exceptions.
A section 146 notice will not be valid unless it complies with all requirements set out within section 146. Those requirements are as follows:
1. The notice must detail the breach complained of
2. The notice must ask the lessee to remedy the breach (if it is capable of remedy)
3. The notice must ask the lessee to make payment in compensation for the breach
Section 146 does not go as far as to confirm how long the leaseholder should be given to remedy the breach except for stating that the period given should be “reasonable.”
14 days is usually sufficient when dealing with service charge debt, particularly given that the leaseholders have previously been in receipt of service charge demands and accompanying budgets and accounts.
No, a landlord can only serve a section 146 notice if the lease contains an express right of re-entry. There is no implied or statutory right of re-entry. It is unusual to see a lease without a right of re-entry in favour of the landlord, although such leases do exist.
Even if a right of re-entry exists, a landlord is not immediately free to serve a section 146 notice relating to service charges as soon as those service charges become overdue. Section 81 of the Housing Act 1996 (as amended by s170 of the Commonhold and Leasehold Reform Act 2002) states that a landlord can only serve a section 146 notice relating to service charge arrears if:
a) A determination has been obtained (either a court order or tribunal determination) confirming the charges are payable by the leaseholder
OR
b) The leaseholder has admitted in writing that the charges are payable and reasonable
Therefore, unless a leaseholder is willing to admit that the charges are payable and reasonable in writing, either court proceedings or an application to the property tribunal will need making by the landlord and those proceedings will need to conclude in the landlord’s favour.
Upon expiry of a section 146 notice, the leaseholder (and their mortgagee if the property is mortgaged) are exposed to forfeiture proceedings. Once forfeiture proceedings are issued and served, the lease comes to an end immediately; the lessee no longer has a right to live in the property and the mortgagee has no security for their mortgage.
It is for this reason that section 146 notices are so effective at recovering unpaid service charges. If leaseholders themselves are not in a position to pay, their mortgagees will often step in and pay the charges to avoid losing their security.
Section 146 notices confirm to leaseholders that they are in breach of their leasehold obligations and mark the first step in the forfeiture process. Section 146 notices are very effective as a debt recovery tool, but it should be remembered that a notice can only be served if the lease contains an express right of re-entry in favour of the landlord, and, if dealing with unpaid service charges, the necessary admission or determination has been secured first.
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