Can a new owner be liable for the previous leaseholder’s breaches or arrears?
27th August 2021
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27th August 2021
It is often stated to us by landlords, agents and even some lawyers, that if a flat is sold and the former leaseholder departs owing monies (or is otherwise in breach at the point of sale) that his/her wrongs are in some way accepted and inherited by the purchaser. This is almost always not the case.
Why? Well the answer is that the lease is a contract and a party cannot be bound by the terms of the contract until they have entered into it. In the case of the assignment of a lease, the incoming buyer does not enter into the contract until they have completed on the purchase and taken the assignment of the lease. This will apply in every case of lease granted after 1 January 1996 by virtue of s.23(1) Landlord and Tenant (Covenants) Act 1995 and by the Apportionment Act 1870 and common law in relation to leases granted prior to January 1996.
The above provides that the incoming leaseholder does not inherit the default of the outgoing owner. So, if the breach arose prior to the assignment, the landlord must take steps to ensure that the outgoing leaseholder has addressed those breaches (paid his service charge or some other matter) before the sale completes, because, as a rule, he cannot pursue the incoming tenant for that breach. The important, and often overlooked, point here is that the onus is upon the landlord and not the incoming leaseholder as the incoming leaseholder is protected by the above provisions.
We provided some guidance on how the landlord, or more likely the managing agent, might avoid this difficult scenario in our Legal Updated from March 2018 which can be viewed by clicking here.
Exceptions s23(1) Landlord and Tenant (Covenants) Act 1995
Sections 23(2) and (3) of the Landlord and Tenant (Covenants) Act 1995 provide that exceptions to the above total exclusion of liability can apply but only in specific circumstances.
Section 23(2) provides that the lack of liability will not apply where the breach has been assigned. This would be exceptional but would apply where perhaps, for some reason, the incoming leaseholder has expressly contracted to pay the outgoing leaseholder’s service charge or, say, agrees to install carpets over previously installed unlawful flooring. Without that express agreement though, the exclusion of liability provided by s.23(1) will apply and the incoming leaseholder will have no liability for those previous breaches.
It is also the case under common law that the lack of liability under s.23(1) will not apply in respect of a “continuing breach”. Continuing breaches are rare beasts but will include matters such as disrepair. A continuing breach will arise afresh every new day. A “once and for all” breach arises, as you would imagine, only once. The most common breaches found to exist following an assignment are “once and for all” breaches such as unpaid rent or service charges, unlawful flooring or alterations and as these are NOT continuing breaches s.23(1) will prevent the landlord from pursuing the new owner for any of those issues not addressed by the former owner.
Section 23(3) confirms that whilst the incoming owner is not liable for the past breaches of the lease by the former leaseholder, the landlord can, where any right to forfeit for that breach has not been waived, still forfeit the lease for that breach upon obtaining a determination for it, notwithstanding that the lease has changed hands. This is the case even though the party most affected by that action will be the new owner. The common result in such circumstances is that the new owner will remedy the breach/discharge the arrears to prevent forfeiture. There is a rather large “but” to this seemingly useful exemption from the problems for a landlord caused by s.23(1).
The “but” referred to above is that the right of forfeiture must still exist and thus cannot have been waived. Accordingly, the advice is to have in place tight procedures that should, of course, prevent the problem from arising in the first place (see our Legal Update from March 2018 here for some suggestions in that regard) but also to enable you to jump on the issue at an early stage so that you do not accidently waive the landlord’s right of forfeiture and kill off that enforcement option.
Waiver will occur quite easily though, so be careful. For instance, it can occur if answers are provided to LPE1 questions prior to the sale (but after the arrears accrued or other breach occurred), or the acceptance of notice of assignment to the new owner, or demanding rent or service charge from the new owner following their purchase. This is by no means an exhaustive list. Any one of these will lose for the landlord the right to forfeit for the breach and therefore remove any ability to encourage the incoming leaseholder to clear the debts of his predecessor.
What about Year End balancing charges?
Most leases will provide that following the end of a financial year, and where there has been expenditure beyond that collected under the earlier budget, a balancing or ‘deficit’ charge can be raised of the leaseholders. As this necessarily follows the production of the annual accounts for the financial year, the deficit demand can end up being served 3 - 12 months following the relevant financial period. If the property has changed hands at any time in the interim period, who is liable to pay the over spend for the previous year?
That balancing charge will be payable by whoever holds the lease at the time that the payment falls due and that is at the point that the demand is raised, not any earlier date. Accordingly, the seller may have paid their service charge fully prior to completion of the sale and have sold prior to the production of the annual accounts for the last financial year. Despite the fact that the purchaser may have since owned the flat only for part of that relevant financial period, or for none of it, it is the current owner at the date of service of the deficit demand - so the new owner - who is the party liable for that balancing charge. It is for this very reason that competent conveyancing solicitors will negotiate with the seller an allowance prior to completion of the sale based upon an agreed guess as to the likely deficit, if any, to be demanded later in the year.
Please take two things from this article.
Firstly, look at your procedures for dealing with LPE1 questionnaires as these are your best indication that a leaseholder is intending to move on. Consider what checks you make before answering those questions and consider refusing to answer them unless and until the selling leaseholder has remedied any existing breaches at that time - do look at our earlier Legal Update, referred to above, for other pointers.
Secondly, if you become aware that a lease has been assigned and the outgoing tenant was in breach then stop everything and review, with advice, your client’s options BEFORE you accept notice of assignment, raise further demands or do anything to recognise the assignment or the new leaseholder. This will assist in preservation of the landlord’s right to forfeit for that breach and, even if the errant former leaseholder has ridden off into the sunset, the landlord is not left without options to obtain remedy of the breaches left behind.
If you have any queries whatsoever, please get in touch with a member of the team on 01435 897297 or firstname.lastname@example.org.
This legal update is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of KDL Law or by KDL Law as a whole.
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