Chris Alexander: Am I Liable For Service Charge Arrears Which Predate My Purchase?

For the answer to this question, Leasehold Life is very pleased to introduce new guest contributor Chris Alexander, a property litigation solicitor at SA Law LLP who advises landlords, tenants and managing agents on all aspects of residential landlord and tenant law. This advice includes service charge disputes, disrepair claims, forfeiture, lease extenstion, collective enfranchisement, right of first refusal and the appointment of managers. Chris also writes the Leasehold Lawyer Blog giving commentary on issues in the world of residential landlord and tenant law.

This is an age old question that comes up regularly in the months after a leasehold purchase when managing agents/landlord’s chase arrears, complete the annual service charge accounts and issue deficit invoices.

Helpfully, like many legal problems the answer to the question in this case is initially "yes" (the reasons for that answer vary depending upon the date which your lease was entered into) but becomes "no" if you are not careful:

1. Old leases – granted before 1 January 1996
   Failure to pay service charges is an irremediable breach of the lease. The historic case law position is that an assignee should not be liable for service charge arrears accruing before the date of the assignment as there was neither privity of contract nor privity of estate at the time of the breach.
2. New leases – granted on or after 1 January 1996
   The Landlord and Tenant (Covenants) Act 1995, which came into force on 1 January 1996 (hence the date distinction) makes express provision that assignees shall not be liable for breaches of covenant prior to the date of the assignment.

Deficit Charges

If you are familiar with living in a leasehold property, then you will know that in the usual course of things a landlord collects service charges on account during the year and then at the end of the year calculates if it has spent more or less than it collected. 

While the expenditure itself may have been incurred prior to the assignment, the obligation to pay the deficit charge does not generally arise until the accounts have been completed and invoices raised.  This means that an assignee can have a liability for service charges that relate to expenditure incurred prior to the assignment, even though they were not the leaseholder at that time.

This is why a good conveyancing solicitor should insist upon some level of retention from the purchase price to protect an assignee from liability for a deficit charge at the end of the financial year. The difficulty is getting the right amount of funds held back to ensure that the assignee is properly protected as managing agents can be unreliable in estimating expenditure!

Common Tactics

This is often bad news for managing agents and landlords who can be caught out by a transaction where there are substantial arrears owing. The common response from them is to refuse to recognise or register a notice of transfer/charge as a tactic to compel the new leaseholder to pay the arrears. This really shouldn’t arise as a good conveyancing solicitor should ensure that the seller is up to date with all payments before completion (or insist that on completion existing arrears are settled) but in practice this doesn’t always happen. There is some legal thinking behind a landlord’s refusal to deal with a notice.

While the new leaseholder can escape liability for a debt which pre-dates the assignment, the landlord does have a general remedy in relation to pre-existing breaches of the lease which could be an issue for the assignee, that remedy is forfeiture.

The fact that there is a breach of the lease gives rise to the right to forfeit, irrespective of whether it was the assignee or their predecessor who was the guilty party. The reason for not dealing with notices etc is to prevent the assignee from being able to argue that the landlord has waived its right to forfeit the lease. There are statutory limitations on the right to forfeit but such action can in principal leave an assignee having to foot the bill for a debt which contractually speaking they were not liable for.  This is how the “yes” answer to this question can become “no”!

The true legal position is a little more complicated than the picture I have painted. However, as a litigation solicitor I recognise that it is almost always preferable for clients to avoid getting into these disputes if at all possible. Making sure that there is an adequate retention on a sale and ensuring all arrears are cleared on completion are two ways of ensuring that a purchaser of a leasehold property does not end up having to write a bigger cheque than they ought to!

Author: Chris Alexander, SA Law LLP
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Every care is taken in the preparation of this article. However, no responsibility is accepted as being owed to any person or organisation that acts on the basis of information contained within it. You should obtain specific advice in respect of individual cases.