If you ask a thousand landlords what happens to service charges when a property is sold, odds are the majority believe arrears will pass to the new buyer.
This is not necessarily the case.
The case needs to be considered for:
Old tenancies (those granted before 1 January 1996); and
New tenancies (granted on or after 1 January 1996)
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.
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.
HOW IS THIS DEALT WITH IN 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 is that the lease continues to be liable forfeiture (brought to an end by the landlord).
This means even if the assignee cannot be sued for the arrears directly, as long as the Landlord does not waive the breach, the assignee may still be liable to pay the arrears indirectly. If the Landlord forfeits, he can recover the arrears from the assignee when the Court grants the tenant relief against forfeiture.
It is less clear whether the position is the same under a new tenancy.
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))
What To Do?
Seek a determination against the assignor. If there are difficulties in locating the assignor, substituted service can be effected. 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:
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 buyers of flats will in most cases check that service charges have been paid before purchasing.
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, Partner at JPC Law