Service charges timebomb is now ticking for apartment owners
OMC's are facing a funding timebomb caused by service charge "won't payers" who are deliberately avoiding their legal obligation, making a mockery of the legal system and causing great hardship for their neighbours.
Service charges are one of the most contentious aspects of apartment living, but payment is a contractual obligation which buyers sign up to at the time of purchase. Most owners do pay and expect others to do likewise. For that, they expect the OMC to deliver a range of services through a management agent. These services include: insurance, lighting, lifts, fire systems, cleaning, landscaping, refuse services and reactive and preventative repairs and maintenance, both short and long term.
The collective payment of service charges -- on time and in full each year -- is not only crucial to the day to day maintenance of the owners' property but important in the preservation of the buildings and the value of their properties.
The "won't pay" types who undermine the arrangement are not people who "can't pay". Those who can't pay may be victims of recession, who can't pay all sorts of bills. But they generally engage with their OMC and negotiate payment plans to clear their debt without imposing the burden of recovery procedures and costs on other owners in the development.
The "won't payers" are different. They are not victims of economics but parasites who for too long have been abusing the goodwill of their neighbours who have been subsidising services for them while they simply shirk their legal and moral responsibilities.
Such parasites can create a funding shortfall of 15pc-25pc in their developments each year. Extrapolated over a number of years, this figure compounds and quickly adds up and solvency threatens the OMCs. Cash flow problems initially may mean deterioration in basic services like cleaning, impacting on the physical appearance of the development. In time even more significantly the shortfall depletes the OMC's reserves and its ability to undertake essential repairs or redecoration work which, left unattended, damage reputation, letting and sale values.
The "won't payers" do not consider the long term consequences of non-payment because, to them, the other owners represent a cheap source of finance.
They are facilitated because the system is flawed and lacks incentives and deterrents.
The penalty for non- payment is negligible as defaulters are only liable to a low level of interest and legal costs incurred against these people cannot always be recouped.
The law allows utility firms such as the ESB to cut off service for non-payment but the OMC has no such similar right. It is generally unconditionally bound under the terms of the head lease to continually supply services irrespective of payment or not.
A workable forfeiture provision (similar to a banks right to foreclose), akin to that provided in commercial leases does not operate in residential head leases in Ireland. Forfeiture has not been part of our culture but in Finland where it is, it acts as a real threat and deterrent to defaulters and seldom is there recourse to such a measure.
Furthermore the Irish legal system for recovery of service charges is very slow, burdened with procedural rules and expensive.
Anecdotally, it is claimed that as much as 60pc of the district court cases are for the recovery of service charge debts. The legal fees for a €2,000 service charge case can vary from €350 to €1,250 excluding vat, outlays and commission.
These fees are essentially being borne by the other owners. It infuriates compliant owners, and justifiably so, to know that their funds are being used to pay solicitors rather than to run the estate where they live. The recovery costs should be automatically awarded against the debtor unless exceptional circumstances exist.
The Multi-Unit Development (MUD) Act 2011 introduced many improved arrangements and consumer protection for apartment living but missed an opportunity to tighten the inherent flaws that are facilitating defaulters.
Problems with the system start with anonymity. Defaulters often avoid their ownership being registered and their documentation being furnished to the OMC, which hinders all administration including the debt collection process.
In relation to any legal proceedings there are also extensive rules for the scripting and service of notices/summons which make it more difficult to recover outstanding charges.
A legal claim can take between 18 to 24 months by which time the "won't payer" will owe one or two additional years which, because of the rules, cannot just be added to an existing claim.
Even when a court grants judgment to the OMC, payment may not occur and it's also necessary to register the judgement to try to get the payment if or when the property is sold.
Fundamentally the mainstream judicial system is not appropriate for the recovery of service charges. The OMC is not a big corporate. It is a not for profit mutual, or collective body, with the sole purpose being to benefit all owners. Non payment by one results in a levy on the other owners. Therefore the rights of the collective group should have (at times) a higher standing in law than the rights of one member.
With rising debts and the threat of insolvency, OMC's require a radical overhaul of arrangements in order to minimise "won't pays".
Future head leases should contain penal interest rates. Legal fees should always be recoverable against the property and there should be a requirement that service charges are paid in full before the property can be put up for sale similar to the BER certificate.
Under the current draft of the Personal Insolvency Bill 2012 there is concern that service charge arrears will be captured under the proposed debt settlement and personal insolvency arrangements and thus, perhaps unintentionally arrears will be unrecoverable under the new legislation.
It is important that service charges be excluded to avoid such a consequence which would further add to the OMC's difficulties.
In the meantime, in order to resolve debt issues and, subject to appropriate conditions for health and safety and requirement for notice, the OMC should have the right to cut off any and all services to the apartments of defaulters.
Otherwise the compliant owners, who wish to avoid the adverse impact of absent services and protect themselves from insolvency, must fund a special levy to bridge the gap. A bridge too far for many.
Siobhan O'Dwyer is chairperson of the Property and Facilities Management Professional Group of the Society of Chartered Surveyors Ireland. She is director of O'Dwyer Property Management Ltd.