Unpaid service charges

It is assumed that any arrears owing at the point of the sale of a flat will pass to the incoming leaseholder. This view is incorrect and can present landlords with a debt that may be difficult to recover, once the outgoing leaseholder has moved on.

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Who is responsible for service charge arrears?

In most leases, service charges will be payable in advance. The owner at the time that the charges are due is the only party liable to pay those charges.

Say for instance the lease requires the service charges to be paid annually, half-yearly or even quarterly in advance on the 1 January in each year. That leaseholder has sold their flat and the completion date is fixed for 14 January, just two weeks after the charges are due. Commonly, the outgoing leaseholder or his solicitors will tender payment for just the first 14 days leaving the incoming tenant to pay the remainder – it is after all they who will take the benefit. Where this happens the incoming leaseholder can decline to pay the remaining balance of the 1 January charges and accept only the charges accruing on the next year/half year or quarter, depending upon the lease, as they were not the lessee at the time of the demand and thus have no liability to pay that charge.

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Can I apportion the charges?

This is a matter between the buyer and the seller, and does not involve the landlord or management company, who is only concerned with the party who is responsible for the charges on the date they fall due. Leave any issue of apportionment to the solicitors dealing with the transaction.

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What about balancing charges following the production of end of year accounts?

The same logic above applies. The owner at the time that the balancing charges are due is the only party liable to pay those charges. In some cases, this can result in the new owner becoming responsible for charges (in some cases, substantial sums) for the prior period during which that they did not enjoy ownership of the flat, where the balancing charges fall due after completion. For that reason, solicitors dealing with the conveyancing will want to obtain details from the managing agents of any likely balancing charges (or credits) at the end of the financial year, so that the buyer and seller can agree a suitable retention. Again, the retention is not something for the landlord or management company to be involved in, and it is strictly a matter between the buyer and the seller.

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Where the leaseholder intends to sell and clear the arrears on sale, but does not yet have a buyer

Clearly, the decision whether to delay enforcement to recover the arrears here is one for the landlord or management company, depending on all the circumstances. Where you are satisfied that there is a genuine intention to sell the property, is that a strict but reasonable deadline for the completion of any proposed sale should be agreed – perhaps with a three or six months deadline. If after that time the sale is not progressing then the leaseholder should be asked to address the debt by other means.

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Where the leaseholder has a buyer and requires your answers to the LPE1 pre-sale enquiries form

Here you need to be cautious and our advice is that you should not provide replies to enquiries unless and until either:

  • the arrears are paid in full; or

  • the leaseholder has accepted in writing that they owe the sum of the arrears (in full) and you have a formal written undertaking from the seller’s solicitors to discharge those arrears (plus any accruing service charges arising in the interim, including any balancing charges which might fall due prior to completion) on the day of completion of the sale. Such undertaking should be conditional only upon the sale, and should agree to defer enforcement action but only for a set period of time sufficient to enable completion to take place (perhaps, 2 – 4 months).

The reason for this strict approach is that by responding to the LPE1 a landlord will be likely to waive any right of forfeiture that was, until then, afforded to the landlord in respect of the arrears owing at that time. Such action may substantially affect the landlord’s enforcement options (and ability to recover its costs for that action) should the leaseholder then fail to pay the arrears upon completion. The landlord in such circumstances may look to his agent for recompense. In the vast majority of cases, that undertaking will be forthcoming.

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What if you get it wrong. Is there a solution?

There is a solution and it does depend on when you realise the error and what has occurred since.

The simple rule is that if a leaseholder has managed to sell leaving arrears, you must act immediately. The first thing for the landlord or his agent to do is to note that the leaseholder is in breach and ensure that no demands, notices or other matters relating to that flat are processed. Of most importance, the notice of assignment from the incoming purchaser should not be receipted, as it is imperative at this stage that you preserve the landlord’s right of forfeiture in relation to the breach.

As explained above, any charges demanded during the sellers’ ownership will remain the debt of the seller and not the purchaser.

Any claim to recover those charges will, therefore, remain the responsibility of the seller and prompt action will be needed to locate the seller and thereafter to pursue the debt. In most cases, non-payment of the arrears will have arisen through an oversight on the part of the seller’s solicitors and once sellers’ solicitors are communicated unpaid service charges would be recovered swiftly.

It is important to stress that this is not an issue that the buyer should take lightly. Whilst the debt remains owed by the seller, the flat acquired by the buyer remains at risk. Provided that the right to forfeit the lease remains intact (including, crucially, no notice of assignment has been accepted to recognise the purchaser as the new leasehold owner), the landlord is still able to re-possessed the flat, irrespective of who owes the debt or that the flat has changed hands. The arrears situation is, therefore, still very much a problem for the purchaser who must take all steps they can to see the arrears paid, to avoid losing their newly acquired property.

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Please contact Pelin Martin to book a 30-minute complimentary property consultation on +0208 994 7327 – pm@bluecrystallondon.co.uk