Q&A - Outstanding Service Charges

The Lease states that service charges must be paid in 2 equal instalments on or before 1 January and 1 July in each year. By concession some lessees are allowed to pay by monthly instalments. 

Recently one of the Lessees disposed of his interest after the 2nd due date leaving a balance of service charge outstanding being the difference of the whole for 2015 less the monthly instalments paid for 8 months. The vendor now refuses to pay the balance saying that it must be paid by the purchaser. The purchaser is unknown and has not applied to this company for a share. According to the statutory books the vendor is still a shareholder. 

How can this matter be resolved without resorting to legal proceedings?

ANSWER

The answer to your question will differ, slightly, depending on whether the lease is dated before 1 January 1996 (making it an “old lease”) or after that date (making it a “new lease”)

If the lease is “new”, then under Section 5 of the Landlord and Tenant (Covenants) Act 1995, the tenant will be released from the burden of the covenants under the lease as from the date of the assignment. So the first thing to do is to try and establish exactly when the tenancy was assigned. You say that you do not know the identity of the purchaser, but that information should be available from the Land Registry. The Title Register should also confirm the date on which the property was registered to its new owner - the registration date is usually a good indicator of the date of assignment, too.

If the lease had not been assigned to the purchaser before 1st July, it must be the vendor who is liable to pay the service charge. He can only claim a release in respect of the tenant’s obligations that arose after the date of assignment.

Something else to consider is the question of whether the vendor was required to obtain your consent for the assignment. If consent was required, but not obtained, then the assignment will have been in breach of the terms of the lease. The relevance of this point is that the release of the tenant’s obligations under Section 5 will not apply if the assignment was in breach of covenant. Either way, it does look as though the vendor is liable to pay the service charge in your example.

If the lease is “old”, then the position is much the same, except that the vendor will not have the benefit of the automatic release contained in Section 5.

Lastly, the 1995 Act contains something of a trap for landlords in these circumstances, irrespective of whether the lease in question is old or new. A tenant who has assigned his lease will not be liable to pay arrears of service charge unless he has been served with a formal notice of default by his landlord, and within no more than 6 months of the due date. With that point in mind, and given that the vendor is still a member of the company, it might be worth finding out whether the Articles contain any provision for shareholders to contribute funds.

That is the technical explanation. The more difficult question concerns how to resolve the dispute without the need for legal proceedings. Realistically, an out of court settlement is going to require some concession on your part. Bearing in mind the likely cost of litigation, you might think about offering to accept a lower sum from the vendor. Perhaps you could also offer to extend the collateral agreement for payment of the outstanding balance by instalments.    

Disclaimer: this answer is for information only and is not intended to be advice. It should not be relied upon as such, and we cannot not accept any liability for loss caused to any person as a result of such reliance.

Adam Osieke, Solicitor at Pemberton Greenish