If you ask a thousand landlords what happens to service charges when a property is sold, the odds are that the vast majority will be of the view that the arrears pass to the new purchaser.
This is not necessarily the case.
The Landlord and Tenant (Covenants) Act 1995 has fundamentally changed the law regarding rights and liabilities of parties to a lease following an assignment but those provisions are not retrospective.
It is therefore necessary to consider the position for:
- Old tenancies (those granted before 1 January 1996); and
- New tenancies (granted on or after 1 January 1996)
The editors of Woodfall (a legal bible on Landlord and Tenant matters) are of the view that an assignee is not liable for sums payable in respect of a period palling prior to the date of assignment. This is stated to be the case whether or not service charge is reserved as rent.
This conclusion is not really surprising. Prior to the assignment, the assignee (incoming tenant) has neither privity of estate nor privity of contract with the Landlord. There is no reason why he should be liable for the breach of another. It therefore follows that arrears of service charge accruing before an assignment are not recoverable from lessees as a debt.
In respect of new tenancies Section 23(1) of the Landlord & Tenant Covenants Act 1995 provides:
“Where as a result of an assignment a person becomes, by virtue of this Act, bound by or entitled to the benefit of a covenant, he shall not by virtue of this Act have any liability of rights under the covenant in relation to any time falling before the assignment’.
In short the assignee of a new tenancy is not liable to pay service charge arrears accruing before the assignment.
BUT STANDARD CONVEYANCING PRACTICE…?
If an assignee is not liable for arrears of service charge, why is it standard conveyancing practice for a purchaser of a flat to seek confirmation from the Landlord that the service charges have been paid?
The answer to this is that the lease continues liable to be forfeit (brought to an end by the landlord).
Which means, even if the assignee cannot be sued for the arrears directly, as long as the Landlord does not waive the breach: it does not matter. The Landlord can forfeit and he will get the arrears from the assignee as a term of the Court granting the tenant relief from forfeiture.
It is less clear whether the position is the same under a new tenancy.
Section 23(1) of the 1995 Act provides that an assignee has no ‘liability’ under the service charge covenants ‘in relation to any time falling before the assignment’. Thus it could be argued that he cannot be required in any circumstances to pay arrears accruing before the assignment even as a condition of relief from forfeiture.
The counter-argument is that Section 23(1) did not change the law. The assignee’s ‘liability’ in the sense of personal liability is the same under an old tenancy as under a new tenancy. Nothing in Section 23 expressly seeks to change the law of forfeiture and one would expect express provision for such a radical change. It is fair to say that this is a difficult point and has yet to be tested.
Despite arguments to the contrary, surely the Landlord would still be entitled to forfeit and would still therefore be able to obtain the service charge arrears as a condition of relief?
THE HOUSING ACT 1996
A further problem which arises is that forfeiture on the grounds of non-payment of service charge (whether reserved as rent or not) is governed by Sections 81 and 82 of the Housing Act 1996 (As amended by the Commonhold and Leasehold Reform Act 2002) with effect from 28 February 2005.
Section 81(1) states:
“(1) A Landlord may not, in relation to promises let as a dwelling, exercise a right of re-entry or forfeiture for failure by a tenant to pay a service charge or administration charge unless:
- It is finally determined by (or on appeal from) a Leasehold Valuation Tribunal or by a Court, or by an Arbitral Tribunal in proceedings pursuant to a post-dispute arbitration agreement, that the amount of the service charge or administration charge is payable by him; or
- The tenant has admitted that it is so payable”.
Two other significant changes were made:
- Landlords cannot serve a forfeiture notice (Section 146 Notice) until the determination or agreement has been made (Section 81(4a))
- The period during which the Landlord cannot forfeit is extended to 14 days after the determination is appealed or the time for appealing has expired (Section 81(3))
Determination Against Whom?
A difficulty however arises where the Landlord is seeking to recover arrears of service charge which accrued prior to an assignment.
Who is the ‘tenant’ against whom the determination must be sought?
It cannot be the assignee as he is not liable to pay the charge. He can only be required to pay the service charge if he is required to do so as a term of relief from forfeiture.
On the other hand, although a determination may be obtained against the assignor, that termination is not to be binding on the assignee.
What To Do?
It seems that the way forward is to seek a determination against the assignor. If there are difficulties in locating the assignor, substituted service can be affected. The assignee should be served with a copy of the proceedings together with a covering letter explaining that the Landlord intends to forfeit if the arrears are not paid and should be invited to join the proceedings if he so wishes.
PROTECTING THE LANDLORD’S POSITION:
To summarise the position thus far:
- As a matter of personal liability, an assignee is not liable for arrears of service charge accrued by his assignor (out-going tenant);
- The Landlord can, however, use forfeiture proceedings to recover the service charge arrears as a condition of granting relief from forfeiture; and
- Before effecting forfeiture proceedings, the Landlord must obtain a determination that the arrears are due.
The threat of forfeiture (or perceived threat of forfeiture) means that purchasers of flats will in most cases check that service charges have been paid before purchasing. Where enquiries are made of the landlord, the purchase can be warned of the existence of those arrears. It is then for the purchaser either to ensure that those arrears are paid, or to take the risk of purchasing a lease which is liable for forfeiture.
Where no such enquiries are made or the purchaser buys without obtaining such information, the landlord may seek a determination of liability in the matter set out above and subsequently issue forfeiture proceedings.
YEAR END BALANCING CHARGES?
Most (not all) leases require tenants pays a service charge at the beginning of the service charge year based on the landlord’s estimated service charge for the year. At the end of that year, the actual service charge for the year is calculated and there is a reconciliation of the account with the tenant paying the balance (if any).
If an assignment takes place during the course of the year and the assignor did not pay the whole or part of the advanced service charge, then can the landlord demand the whole sum from the assignee or can he only demand the balance between the estimated and actual service charge?
As a matter of conveyancing practice, it is not unusual for the purchaser of a flat to have a retention from the purchase price to cover this situation.
It is clear that an assignee is not liable as matter of debt for arrears accuring before the assignment. What is also clear is that the landlord may still use the threat of forfeiture as an effective tool to ensure that the assignee with pay the arrears.
Health Warning! If you are buying a flat make sure you seek confirmation from the Landlord that the service charges have been paid!
Yashmin Mistry, Managing Partner, JPC