One option is to secure the unpaid fees against the parents' property using a voluntary legal charge.
The voluntary legal charge process can be an amicable and effective solution for dealing with parents in financial difficulty. This is particularly the case in situations where court action is considered to be too aggressive, and where the relationship between the parents and the school needs to be preserved.
In order for a voluntary legal charge to be an effective solution for debt recovery, you should consider the following practical issues:
Existing lenders with mortgages secured against the property are usually required to consent to your school's legal charge as a subsequent charge. You should therefore ask the parents to confirm at the outset whether or not they are up to date with their mortgage payments, and ensure that they have obtained approval in principle from their mortgage provider to a subsequent charge to avoid any delays. Some lenders do not agree to second charges as a matter of policy.
You should also ask the parents to provide details of any other debts secured against the property, as these will diminish the value of the equity in the property against which to secure the unpaid fees. If the amount of fees owed is significantly greater than the value of the equity, then there may be little point in proceeding with the charge as the fees would not be secured.
The process is voluntary, and in order for the charge to proceed smoothly, cooperation from parents is vital. Consider the conduct of the parents generally with regard to fees - do they have a tendency to make promises they do not keep with regard to the payment of fees? Can they be difficult to contact? If parents are uncooperative, this can make the process more expensive and time consuming for the school.
The Mortgage Credit Directive (MCD) came into full effect in March 2016 and broadened the types of arrangements that require a lender to be authorised by the Financial Conduct Authority (FCA). In most cases, legal charges over residential property, which secure the payment of outstanding fees owed to a school are now caught under this legislation. We have therefore developed additional documentation, in the form of a 'refinancing' settlement agreement, to make use of the exemptions and exceptions under the MCD. This agreement sets out the new payment dates for the debt owed and allows the legal charge mechanism to still be used without requiring authorisation from the FCA. One of the impacts of the MCD, however, is that no interest or other charges can be charged on the debt.
In appropriate circumstances, the voluntary legal charge (and the settlement agreement which sits alongside it) is very effective. It can enable schools to secure outstanding debts and then recover them quickly when the property is sold or the parents re-mortgage, whilst still preserving the existing relationship between the parties. As an example, recently we have seen clients quickly recover fee debts of over £70,000 using the voluntary legal charge mechanism.
If you would like to explore the voluntary legal charge process in more detail or would like to discuss any other property issues, please contact Robin Rajanah on 0117 314 5255.