Who pays when the property has been sold?
Often when long leases are transferred or sold there are unpaid service charge arrears relating to periods before the actual sale date. Who should the managing agents claim payment from? The seller (outgoing leaseholder) or the buyer (new leaseholder)?
In a perfect world the buyer would have made enquiries of the seller before the sale completed to ascertain what the level of service charge was and whether there were any unpaid amounts and the seller would have been honest and supplied all information. Ideally, the seller would have contacted the managing agents to obtain all the up to date information thereby alerting the managing agents to the fact a sale was going ahead and allowing them to prompt the seller into obtaining proper consent to sell (if applicable) and to serve a Notice of the Assignment when the sale had concluded.
A proper contract clause should have been drawn up to deal with the arrears between the seller and the buyer – usually that the seller will pay all arrears before the sale date and supply evidence – usually a receipt for payment on completion.
Regretfully, however, too often this does not happen and the sale takes place and the arrears still exist.
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What can managing agents do to recover the arrears?
If managing agents are faced with a new leaseholder (buyer) who is refusing to pay service charge arrears as they relate to a period before his ownership (even though demands were issued at the time of the purchase) then they cannot make the demands of the buyer or seek a County Court Judgment against the buyer. This is because according to general law and the Landlord and Tenant (Covenants) Act 1995, a buyer is not liable under any of the covenants of a lease until the actual assignment /purchase takes place. So, service charges accrued before the assignment/purchase are not the responsibility of the buyer. However, as long as there has been no waiver of the right to forfeit, the lease may still be forfeited for non – payment of service charges. Note that demand for payment of past arrears does not waive the right to forfeit provided that the assignment /sale of the lease has been effected correctly and no breaches have been incurred – e.g. formal consent to assign/sell has been obtained and if notice of the assignment/sale was required that it has been formally given. As a result, it is in the best interests of the buyer to pay those arrears to avoid forfeiture proceedings.
Correct procedure – a summary
1. If the seller has not admitted the arrears then application may be made to the First-tier Tribunal (Property Chamber) (FTT) for a determination or to the County Court for a judgment in respect of the arrears. The correct party to the proceedings is the SELLER as the arrears are due from him.
It is good practice to give notice of the proceedings also to the buyer – as he may make the decision to settle the amount owing up in order to avoid further proceedings and costs.
2. Check the lease to ensure that the service charges are ‘reserved as rent’. If not then it will be necessary to serve a Section 146 Notice on the BUYER as ‘lessee’. If the buyer does not pay the arrears within the time stipulated in the Section 146 Notice then possession proceedings can be commenced against the buyer. Often relief against forfeiture will only be granted if payment of the arrears of service charge is made either by the buyer or their mortgagee.
Beware the following instances
In some instances care is needed as the above rules will not necessarily apply, for example:
- If the seller has sold the lease without the landlord’s consent (a breach of covenant in itself) then be careful not to accept payment of subsequently demanded service charges (relating to the period after the sale) from the buyer – as this will waive the right to forfeit for the past arrears.
- If the seller or buyer has transferred the lease without serving a Notice of Assignment on the landlord then take care not to ascertain the buyer’s name and invoice and accept payment for subsequent service charges (relating to the period after the sale) from the buyer as the right to forfeit for past service charge arrears may be waived by this demand.
- Balancing Charges – note these may correctly be the responsibility of the buyer. If, under the terms of the lease, they are issued on or after the date of the purchase by the buyer. If they fall due after the date of the purchase then the correct party will be the buyer but careful examination of the lease will be necessary to ensure the correct payer is identified.
Where SLC can help?
As can been seen from the above the question of whom to proceed against is fraught with difficulties and care needs to be taken in examining the lease and each particular set of circumstances. SLC Solicitors has years of experience in dealing with this type of problem from being able to analyse the most difficult of leases right through to making applications to County Court and the FTT as well as service of Section 146 Notices. Most importantly, our track record in recovering arrears on behalf of managing agents and landlords is second to none.