Retentions or Undertakings
Many new leaseholders receive service charge demands long after completion of the sale, and usually because there is a shortage for the service charge accounting year during the time the seller owned the property. Any monies owed (or credited) are not finalised until the accounts for the block are issued some months later.
The basic rule in here is that under the Special Conditions of Sale, the service charges should be apportioned between the buyer and the seller with effect from the completion date. There are two forms apportionment can take: an undertaking, or a retention clause if the lease provides for payments on account (with a balancing payment at the end of the service charge year). The sales contract should a) specify the amount and b) how long it is to be held for.
On the other hand, if no apportionment is made at the time of the completion (or a retention clause agreed), recovery of any arrears relating to the seller’s period of ownership will need to be made directly from the seller.
If a contract clause is used then a payment of the balancing charge would be binding only on the seller, not the solicitor and could read something like this: “The Seller agrees that his solicitor will hold a retention from the sale proceeds in the sum of £X pending production of the final accounts of Some Flats Management Company Limited for the 2010/2011 financial year. On production of the accounts and in the event that a balancing charge is payable the Buyer will, via his solicitor, calculate what proportion is due from the Seller and will provide the Seller’s solicitor with a completion statement. Provided the Seller’s solicitor agrees with the Buyer’s solicitor’s calculation the Seller irrevocably instructs his solicitor to release the amount due to the Buyer in accordance with the completion statement. In the event that the retention is insufficient to meet the proportion due the Buyer will accept the full retention in full and final settlement. In the event that no completion statement is produced by [a date by which the final accounts should have been produced and the buyer’s solicitor should have had time to produce a statement] the Seller shall not be liable to the Buyer for any monies that would otherwise have been due and the retention shall be released to the Seller in full”.
SELLING A FLAT WHEN ARREARS AREN’T PAID
I had always understood that a leasehold property could not be sold if there were outstanding service charge arrears. One of the flats on our block had run up service charge arrears of nearly £10,000 but had totally ignored the demands for payment and exhausting the managing agents in-house procedure for debt recovery. After we had instructed that a Letter Before Action be sent. the flat was put on the market and as expected, the timeframe for a response from this subsequently also expired and no payment (or explanation for the arrears) was forthcoming.
When there was an impending sale of the property we had intended to seek payment of the outstanding arrears upon completion by way of a retention clause (see above). The sale fell through and we were advised that in order to bring matters to a head we protect our position by way of issuing proceedings and obtaining judgment. If payment was still not forthcoming, the judgment could then be enforced. Enforcement could also be considered in addition to seeking the relevant undertakings from the Seller/its Solicitors to settle all outstanding arrears upon completion of a sale of the property.
The response from the sellers solicitor was somewhat vague so our solicitors recommended we give the seller a further 14 days to confirm whether or not there was still the intent to sell as the process by then had already fallen through twice.
We then instructed proceedings be placed on hold because our managing agent had entered into an arrangement with the solicitors acting for the seller (but kept us out of this particular loop). Payments would be made monthy until the property was sold. Monies were received in the initial stages of this agreement but suddenly stopped with no explanation given.
Our solicitor also received a letter from the sellers conveyancing solicitor seeking to assure us that the seller was still attempting to sell the property and that all outstanding arrears will be settled upon completion of the sale, but they also sought an undertaking from us to put debt recovery proceedings on hold!
After gong through all that, and again with no explanation or apology the seller suddenly paid the arrears and the flat was then sold!