Liability for service charge arrears following assignments
Landlords are often left with the problem of service charge not being paid or recoverable from the Tenants. Below we look briefly at options available to Landlords, when seeking to recover service charge from former tenant’s, following assignment of the lease.
First and foremost, check the assignment is correct as per the lease, otherwise possible course of action on the basis of breach and forfeiture. Secondly, check the details of the arrears and whether they are owing pre or post assignment. If post then needless to say liability for payment is that of the assignee.
Before commencing any action, consider whether the service charges claimed are recoverable and the correct procedure and provisions are complied with, such as that as per the lease, the Landlord & Tenant Act 1985, Landlord & Tenant (Covenants) Act 1995 to name a few. Listed below are examples that may affect recoverability of the service charge:
- Within 18 months of the expenditure of the work or item incurred, the demand for service charge was made. Otherwise it is unrecoverable (see section 20B of LTA 85).
- The demand letter sent provides the name and address of the Landlord (and is within the England and Wales). Otherwise special rules apply. (see section 47 & 48 of LTA 85)
- Failure to provide Service Charge accounts or certificated accountants report may result in the tenant not having to pay service charge within the accounting period (see section 21 and 21A LTA 85).
- Are the arrears disputed? - Unable to take forfeiture action until the amount in dispute has been agreed, amongst other conditions (s167 Commonhold & Leasehold Reform Act 2002)
Recovery of arrears against the assignees
The Landlord and Tenant (Covenants) Act 1995 brought about changes from 1st January 1996 in respect to rights and liability of parties to a lease. Therefore, it is important to consider the date of the lease and whether they fall within the 1995 Act.
Leases pre-1st January 1996
Most authorities state that the assignee is not liable for sums payable in respect of a period falling prior to the date of assignment. Where the breach is complete before assignment the assignee is generally not responsible.
Service Charges and Ground Rents are in their nature due and payable on the set dates demanded and non-payment is in its nature a once and for all breach and the tenant becomes liable on that specific date. It is not a situation where the breach of the covenants is on going and continuing with the assignee.
A further point of view is that, on a contractual basis, the assignee prior to the assignment was not party to the contract or does not have an interest in the land, and it therefore follows that he should not be liable for the breach of another.
Leases post-1st January 1996
The Landlord & Tenant (Covenant) Act 1995 clarified this issue, by virtue of section 23(1):
“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 or rights under the covenant in relation to any time falling before the assignment.”
Put simply, this means that the assignee is not liable to pay the service charge arrears arising before the assignment.
Options available to recover arrears
Arrears accruing prior to assignment can only be recovered against the assignor, and not the assignee.
Other options for recovery
As with any lease, the landlord’s greatest form of protection from a breach of the covenants of the lease is forfeiture. Such action can be taken against the assignee, as the landlord merely needs to prove breach of the covenant and it does not matter who breached it.
Therefore, the assignee will be required to make good the arrears to obtain relief from forfeiture. The above is on the assumption the landlord has not waived the breach. Any claims based on arrears are to be brought in the County Court.
For leases post 1st January 1996 the position is rather unclear. Section 23(1) of the 1995 Act states clearly that the assignee has no liability for arrears prior to assignment, and it is arguable that he is not required to pay, even for purposes of relief from forfeiture.
On the other hand, it may be argued that section 23 made no mention of changing the law concerning forfeiture and these rights are still present for landlords.
Problems with forfeiture
Before proceeding with forfeiture, the landlord must abide by section 81 and 82 of the Housing Act 1996, as amended by the Commonhold & Leasehold Reform Act 2002, and namely first obtain that a determination that the arrears are due from the Leasehold Valuation Tribunal, the Court or an Arbitral Tribunal, unless the amount is admitted by the tenant.
Point of interest
Before proceeding with forfeiture it must be considered whether the landlord’s rights to forfeit have been waived, especially following assignment. Therefore, landlords may wish to consider not consenting to assignment of the lease to avoid not being able to recover the arrears from the assignor.
However, it should be pointed out the consequences of withholding consent are determined based on the lease, section 19 of the Landlord and Tenant Act 1927 and a possible damages claim under section 4 of the Landlord and Tenant Act 1988.
Nevertheless, it may possibly be argued on reasonableness that withholding of consent is necessary to recover the arrears from the assignor, and possibly by forfeiture of the lease.
Summary:
- The assignee is not responsible for the arrears that have accrued prior to assignment by the assignor.
- Recovery of the arrears is possible against the assignor, if traceable.
- Forfeiture proceedings to recover the arrears, with payment being made by way of relief from forfeiture may be possible against the assignee, but before doing so the landlord must obtain a determination, unless the service charge has been agreed by the tenant.
For further information on Housing or Residential Landlord and Tenant matters feel free to contact Helen Essery on helene@n-v.co.uk or 024 76 234227.