The Legal Duty
Some homeowners won’t pay invoices on time. It’s one of those facts of life. Sometimes because they don’t want to, sometimes because they don’t have the money and sometimes because they have a dispute with the factor about the invoiced amount. Oh, and sometimes people genuinely forget or the invoice got diverted into spam or got lost in the post.
As a starting point, property factors are required by law (The Property Factors (Scotland) Act 2011 Code of Conduct, Section 4) to have a clear, written debt recovery procedure that is made available to all homeowners. This procedure must be consistently and reasonably applied.
The factor must clearly set out any late payment charges (which must not be unreasonable or excessive). For instance the first stage is often to write a reminder to the homeowner – if they are going to charge £50 for that letter, is that reasonable? So the factor’s debt recovery policy needs to clearly set out what will be done, when, and what penalties might be.
Sometimes, as a last resort, debts need to be charged to other homeowners, so the factor’s written procedure must explain how, and at what stage, debts will be charged to other homeowners if they are jointly liable for common costs under the title deeds.
Early Stages: Communication
It may seem obvious, but the foundation stone of debt recovery is for the factor to have systems which reconcile payments against invoices and to issue timely written reminders for outstanding amounts. You’d think that this would be “factoring 101”, but sadly, many factors fail at this first hurdle.
The factor must follow the dept recovery process that they’ve laid out in their Written Statement of Services. This will likely (although not necessarily) look something like”
- A written reminder 30 days after issuing the invoice, possibly incurring an “administration charge”.
- A further written reminder after a further period, likely incurring a higher charge or penalty.
Before taking legal action, the factor must take the steps that they’ve laid out, such as the above, trying to resolve the matter and treating customers fairly.
Factors should advise the homeowner of the availability of free and impartial debt advice from not-for-profit bodies. And they mustn’t act in an intimidating or threatening manner.
Escalation to Legal Action
If the steps, above, don’t result in payment then the factor should move to legal action. I say “should” because non-payment isn’t a victimless “crime”, it affects the other owners who have paid. In my experience, many factors are slow to move to legal action – probably because it takes management time. Legal action must not be taken without first giving the homeowner notice of the intention to do so.
For debts up to £5,000, factors typically use the Simple Procedure in the Sheriff Court. The factor will need to demonstrate that they have taken all reasonable steps to recover the debt from the non-paying owner before charging other jointly liable owners. Unless the debt is a trifling amount, it would be reasonable to expect a factor to take matters to the Sheriff Court, before burdening other owners with extra costs. That’s a good question to ask a potential factor during any “beauty parade” – if you activate the Simple Procedure for debt recovery, will you be charging owners a fee or is that included in your basic management service?
If however, a homeowner disputes the debt and takes the matter to the First-Tier Tribunal for Scotland (Housing and Property Chamber), the factor mustn’t continue to apply interest, late payment charges, or pursue legal action on the disputed part of the debt.
Securing the Debt against the Property
An alternative to the Sheriff Court, or indeed an adjunct to it if the Sheriff Officers fail to recover the debt is that the factors can register a Notice of Potential Liability for Costs (NOPL) against the property under the Tenements (Scotland) Act 2004.
This notice flags the outstanding common repair costs to any potential purchaser’s solicitor. And frankly no conveyancing solicitor is going to recommend that their buyer progresses the purchase if there’s an NOPL lodged on the property (or at least the purchase price is reduced accordingly).
The NOPL is a powerful tool as it effectively means the debt must be paid in full before the sale can be completed. If the debt isn’t paid then the NOPL can automatically transfer to the new owner (who will then be liable for the outstanding debt). The NOPL is generally valid for three years and can be renewed if the debt remains unpaid. So it isn’t foolproof but it can be highly effective if the owner has ambitions to sell.
Other Debt Enforcement Options
If things get really sticky, court action is successful, a Decree (court order) is granted, and the owner still fails to pay, the factor can pursue further enforcement action via Sheriff Officers.
These can include serving a Charge for Payment (a final 14-day demand), or more severely, Arrestment of Wages (so the owner has his/her pay docked at source) or Arrestment of Rental Income (if the property is rented out).
The factor must ensure any enforcement costs are applied to the debtor’s account and are legally recoverable.
It’s very unlikely that a debt will progress to these, quite extreme, stages, but you do need a factor who knows the legalities and can deploy them when required.
