Leaseholders selling up with unpaid service charges
19th March 2018
19th March 2018
It is a common misconception 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. In this update, we remind readers of the best approaches to this issue so that you/your landlord clients are best protected in respect of such a debt.
Where the leaseholder intends to sell and clear the arrears on sale, but does not yet have a buyer
Clearly, the decision to delay enforcement to recover the arrears is one for the landlord or management company but our advice is that a strict but reasonable deadline for completion of any proposed sale should be agreed - say three or six months. If after that time the sale is not progressing, the leaseholder should be asked to address the debt by other means. We can of course assist with those options, which need not require legal action or huge expense for the struggling leaseholder.
Where the lessee has a buyer and requires your answers to the LPE1 pre-sale enquiries form
The landlord, management company or agent must be cautious in these circumstances and our advice is not to 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 arears (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) on the day of completion of the sale. Such undertaking should be conditional only upon the sale.
The reason for this strict approach is that the landlord’s rights of forfeiture that would, until then, have been available in respect of the arrears owing at that time are likely to be waived by responding to the LPE1. Such action may substantially affect the landlord’s enforcement options should the arrears not be paid upon completion, and were that to occur the Landlord may look to his agent for recompense.
What if you get it wrong. Is there a solution?
The good news is, the answer is ‘yes’. However, 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 to do is to ensure that it is clearly recorded that the leaseholder is in breach of the lease 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 or processed.
In most cases, non-payment of the arrears will have arisen through an oversight on the part of the seller’s solicitors and a quick call to them will likely see payment arrive promptly. Where that does not happen, the landlord will need to take prompt action to address the position and he should consult his leasehold enforcement solicitors immediately.
One final note
Don’t be tempted to apportion arrears between the buyer and the seller.
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 quite properly 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 leaseholder at the time of the demand and have no liability to pay that charge.
Accordingly, when you seek the undertaking referred to above, do ensure that it covers all charges demanded in full and that apportionments are not accepted.
For more information, please contact Kevin Lever, Solicitor, on 01435 897297 or email@example.com.
This Legal Update describes the position in law as at the date of this article and care should be taken to note any subsequent amendments to the position as set out above. The 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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