Purchasing a leasehold and service charges

1st June 2021

Unpaid Service Charges when selling and buying a Leasehold

There is often a common misconception with service charge arrears, where it is often assumed that any arrears at the point of a sale would pass to the new leaseholder. However, depending on your lease, it is actually more common for whoever the existing leaseholder at the time of the service charge demands will remain liable. This, of course, can always be negotiated within the purchase of a sale and it is always important to check your lease on this term.

What happens to the service charges when a leaseholder sells?

In most leases, you will find service charges are payable in advance and it is the owner at that time who is liable to pay those charges. For example, if a lease requires service charges to be paid annually on the 1st June each year and a purchaser has a completion date of 1st July, you may find the seller’s solicitors will request payment for the 30 days and then the purchaser pays the remainder. However, whether the new leaseholder accepts this or not will all depend on the lease. As they were not the lessee at the time of the demand they may have no liability to pay that charge and would only be liable for the following year.

Can the service charges be apportioned?

Managing agents are unable to apportion any arrears between a buyer and seller. As this would be a matter between a buyer and seller, solicitors would need to confirm any apportionment when dealing with the transaction.

What happens to the balancing charges to the end-of-year accounts when a leaseholder sells?

Again, the leaseholder at that time of when the balancing charges are due would be liable to pay those charges. However, a new leaseholder may be responsible for the charges for a period where they did not own the property should the balancing charges fall after completion. The solicitors will obtain details from the managing agent of any likely balancing charges or credits at the end of the financial year so that the buyer and seller can agree on a suitable figure. 

The managing agent does not get involved with any apportionments with this figure and is something the solicitors will deal with as part of the transaction

Is there a solution if leaseholders get this wrong at the point of a sale?

Luckily yes, you may be able to correct this if it wasn’t realised at the time of the sale, however, this will depend on what the error is, how long it takes you to realise and what has happened since. If a leaseholder has managed to sell a property leaving arrears, as soon as this is discovered you should take action. Most importantly, the notice assignment from the incoming purchaser should not be received, as you need to preserve the right to forfeiture in relation to the breach. Non-payment of arrears can most likely be recovered by the sellers’ solicitors, as long as this is addressed promptly. If the seller does not pay it may mean you need to contact leasehold enforcement solicitors.

As a buyer, could my property be at risk if there are unpaid service charges?

Unfortunately yes, whilst the debt remains owned by the seller, the property can still remain at risk. This is why the right to forfeit the lease needs to be in play, for example, no notice of assignment has been accepted to recognise the buyer as the new owner. The freeholder is still able to repossess a flat, regardless of which person owes the debt or if the property has been sold. The service charges, therefore, could be an issue for a purchaser to avoid repossession. However, more often than not legal action would be required in this instance.

If you require any assistance in regards to the management of a block and dealing with service charges, please don’t hesitate to contact us for a quote.

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