Bought a leasehold property and realised there are Service Charge arrears? Can the landlord claim from you the arrears owed by the previous owner?
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Needless to say, you, as a buyer of a leasehold property, would expect your solicitors to undertake careful due diligence before contracts are exchanged. Such due diligence should draw to the surface all matters of risk that need to be addressed before the ownership passes to you. Recent case law highlighted how indeed important such due diligence is.
A buyer has bought a leasehold property. It was not until after completion, it transpired that there are service charge arrears from a previous tenant (not the buyer’s vendor but the vendor’s predecessor). The buyer’s solicitors made all necessary enquiries and searches. Nonetheless, the arrears were missed. The question was: can the landlord claim the arrears from the current tenant, the buyer?
What is Service Charge
Service charges are levied by landlords to recover the costs they incur in providing services to a building. The way in which the service charge is organised is set out in the tenant’s lease or tenancy agreement. The charge normally covers the cost of such matters as general maintenance and repairs, insurance of the building and, where the services are provided, central heating, lifts, porters, lighting and cleaning of common areas, etc. The charges may also include the costs of management by the landlord or by a professional managing agent and for contributions to a reserve fund.
Relationship of landlord and tenant
The relationship of landlord and tenant has its origins in the medieval land law and was originally one of contract only. However, from early times the contract conferred an estate or proprietary interest in the land on the tenant without losing all its contractual characteristics. Today, the Law of Property Act 1925 (LPA 1925) provides that a leasehold interest, known as a term of years absolute, is one of the two interests in land which exist as a legal estate, the other being an estate in fee simple absolute in possession.
The relationship of landlord and tenant normally arises from an agreement under which one party confers on another “the right to the exclusive possession of land, mines or buildings”, for a time which is either subject to a definite limit originally, as in the case of a lease for a term of years, or which, though originally indefinite, can be made subject to a definite limit by either party, as in the case of a tenancy from year to year. A tenancy from year to year is saved from being uncertain because each party has power to determine the tenancy at the end of any year. The two attributes of exclusive possession and a definite or potentially definite time limit are essential to all tenancies. The interest in the property which remains in the landlord or lessor is called the reversion, and normally there is incidental to it the right to receive from the tenant payment for the use of the property in the shape of rent, and the right to compel the performance and observance by the tenant of covenants and conditions.
Service charge arrears following assignment of lease
As we have mentioned from the start, ideally, the buyer’s Solicitor will have clarified any outstanding service charge arrears and taken steps prior to completion of the purchase to ensure that the arrears are settled.
As a matter of law, the arrears remain the liability of the previous leaseholder and do not pass on to the new owner, as set out in The Landlord and Tenant (Covenants) Act 1995 (LT(C)A 1995). The Act explains that the assignee cannot be bound by covenants within the lease, such as service charge liability, until after the transfer of title has taken place.
With respect to ‘old’ leases granted before 1 January 1996, failure to pay service charges is an irremediable breach of the lease. The historic case law indicates 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
However, a landlord can still take action against the previous leaseholder, to obtain a judgment and determination against the previous leaseholder. The determination will permit the landlord to take action against the new tenant as a result of the breach of the lease.
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. It may be possible for the assignee to argue that the landlord has waived his right to forfeit the lease if he has not acted against the vendor or his predecessor and has recognised and/or registered a notice of transfer/charge. 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 he was not liable for.
Our advice: The purchaser is not liable ‘per se’ but the landlord may seek to forfeit the lease and this will often lead to the purchaser being forced to settle an outstanding service charge.