Under the Special Conditions of Sale, the basic rule is that outgoings of the property should be apportioned between the buyer and the seller and both conveyancers will work out the apportionment on service charge demands with effect from the completion date. Despite this, many new leaseholders receive service charge demands long after purchase. usually because there is a shortfall 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 usual way to allow for such debts is for the conveyancing solicitor or property lawyer to agree with the purchaser’s conveyancer to hold back a small amount of money from the sale proceeds which will be passed on when the actual amount of the debt is known. This is known as a retention and it will need to be dealt with either by an undertaking or a service charge 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”.
Where a problem can occur is where the seller is already in arrears, the debt recovery process has already been started but there is no undertaking given to pay them. We had this exact situation with a flat on our block and our company solicitors had made a request to the buyers solicitor to be responsible for settling the outstanding sums on completion. Despite their request for an undertaking, the information from the solicitors acting for the seller were vague so they recommended we give the seller 14 days in which to confirm whether or not the sale was proceeding as it had already fallen through twice. Failing this, we might wish to consider issuing proceedings and continuing with the debt recovery process. Continuing to give more time to achieve a sale and to pay the arrears then would only serve to increase them and it was possible it was just a delaying tactic. On the other hand, if the sale did go ahead and proceedings were started then settlement would be made from the proceeds of sale. It could however be a minimum of 6 weeks before payment of the outstanding arrears could be obtained.
We reached a point where an agreement was made that arrears payments would be made monthly until the property was sold. Monies were received in the initial stages of this agreement but shortly stopped.
Fortunately, after all this, the seller suddenly paid the arrears and the flat was then sold.