Bad Debts in Owner Management Companies

A query often arises on how, or if, to provide for bad debts (unpaid service charges) in an owner management company.  It is argued that because the property can never be sold without discharging the service charge, it should not be provided for as a bad debt.  However, something that may not be paid for a number of years is worthless and should be provided for.  At the same time, writing off bad debts may send the wrong signal to the rest of the owners in the development.  The advice given to members, whether auditors, directors or owners, is that the owner management company needs to adopt a clear policy on the issue, disclose this policy in the annual financial statements and then stand by and apply the policy consistently.  The type of policy appropriate would be something like:

• Outstanding service charge less than 3 months overdue: nil accounting bad-debt provision.
• Outstanding service charge 3 – 6 months overdue: nil accounting provision; send reminders; offer deferred payment or other payment options; discuss payment plan with householder.

• Outstanding service charge 6 – 12 months overdue or payment plan reneged on: nil accounting provision; send legal letter and add interest and collection fees to amount due.

• Outstanding service charge 12 – 24 months overdue: provide 50% of the amount due by way of an accounting bad-debt provision and commence legal collection process, including collection of additional legal fees and interest.
• Outstanding service charge 24 - 36 months overdue: provide 100% of the amount due by way of an accounting bad-debt provision and proceed to judgement debt, with further legal fees and interest to be added.
• Outstanding service charge 36 months or more overdue: take a legal charge on the property for outstanding service charge, with further legal fees and interest to be added.

Agree the policy at the AGM, publish the policy in the financial statements, and stick to the policy.  Include a late payment penalty for the service charge.  Tenants would welcome an open and transparent approach, and directors would welcome a clear mandate at the AGM for the policy.

Brian Dignam is Partner - OSK Audit.