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A common problem for freeholders (referred to in this article as landlords), management companies and managing agents is the assignment of a lease without the landlord's knowledge, at a time when arrears of service charges are owed by the outgoing tenant.

A number of factors determine from whom such arrears can be claimed and how forfeiture proceedings based on their non-payment should be commenced.

The point at which the lease vests in a purchaser of the leasehold title depends upon whether the Land Registration Act 2002 (“LRA”) applies to the lease in question. Under section 4 of the LRA virtually all new leases granted for a term of seven years or more and also assignments of leases which have seven or more unexpired years left to run must be registered at Land Registry.

Where the LRA applies the lease does not vest in a purchaser until the assignment has been registered at Land Registry. Provided there is no provision in the lease to the contrary, upon registration a purchaser becomes liable for payments of rent and service charges that fall due after this date. A landlord or management company should be careful to check that the covenant to pay service charges is not worded so as to be personal to the outgoing tenant. This would be most unusual. Provided the relevant covenant is not personal, registration is also the point in time after which a purchaser becomes the correct recipient of demands and notices served in accordance with the lease, most notably a notice under section 146 of the Law of Property Act 1925.

Therefore a section 146 notice should be served on a purchaser regardless of whether the breach of the lease complained of occurred before or after registration of the assignment.

In practice there will be a period of time between the completion of the assignment deed and its registration at Land Registry. During this time the outgoing tenant remains the legal owner of the leasehold title, but holds it on trust for a purchaser. If a service charge or rent payment becomes due during this period of time the outgoing tenant is liable for its payment. In practice, however, a landlord or management company should demand payment of the sum in question from both the outgoing tenant and a purchaser, and it is undoubtedly best practice that any section 146 notice served during this period of time should be served on both the outgoing tenant and a purchaser.

If the LRA does not apply (for example if the lease is transferred to a mortgagee pursuant to an order of the court, or is transferred by operation of law) the lease vests in a purchaser once a deed of assignment has been completed. Once a landlord or management company becomes aware of the assignment a purchaser becomes the correct recipient of notices served under the lease and also demands served in respect of rent and service charge payments that accrue due after the assignment. Again, this is the case provided the covenants in the lease are not personal to the outgoing tenant.

It makes no difference to the point at which the assignment of the leasehold title occurs whether the assignment was in breach of covenant, for example if the lease provides that the landlord‟s consent must be obtained before assignment and no such consent was obtained.

In answering this question one must first examine the terms of the lease and any assignment documents or deed of covenant to see if there is any contractual provision on this point. Assuming that there is not, it is then necessary to distinguish between charges the payment of which actually became due before the date of the assignment and charges which relate to a period before assignment but which, upon a proper construction of the terms of the lease should have been paid after the date of the assignment.

If the charges became payable before the assignment, the purchaser is not liable. If the charges became payable after the assignment, the purchaser is liable.

If the charge is rent or a service charge reserved as rent a purchaser is not liable for charges that became due prior to assignment. This is because under the Apportionment Act 1870 rent is treated as accruing from day to day. If the covenant in question is to pay a service charge the answer is also that a purchaser is not liable for arrears prior to assignment. The reason is that at common law a purchaser is only liable for the outgoing tenant‟s breaches of covenant if they are „continuing breaches‟ and a failure to pay rent or a service charge that became due on a particular date is not such a breach.

As above, the Landlord and Tenant (Covenants) Act 1995 applies to such leases. Essentially, the position is the same. Section 23 (1) of the Act provides that a purchaser is not liable for defaults occurring prior to assignment, unless the parties concerned have made an agreement to the contrary. So what can the landlord/management company do about arrears?

There are three options:

1. If the lease requires a landlord‟s consent to a proposed assignment and the assignment has not yet occurred a landlord should consider whether to withhold such consent if there are arrears. The law on what constitutes reasonable grounds for the withholding of such consent is considerable, complex and depends upon the individual context, so a landlord should be sure to seek legal advice before pursuing this option.

2. After an assignment, a landlord or management company can sue the outgoing tenant. If the whereabouts of the outgoing tenant are unknown it may be helpful to make enquiries of the purchaser and the solicitors involved in the conveyance. Reasonable steps will have to be taken to find the outgoing tenant‟s new address or an alternative address for service. There are specific rules relating to the service of documents in the County Court.

3. Provided the landlord has obtained a determination from the court or the Leasehold Valuation Tribunal that the outgoing tenant owes arrears of service charges, the landlord can serve a notice under section 146 of the Law of Property Act on the purchaser. Most leases are worded in such a way that it does not matter whether the breach of the lease complained of occurred before or after assignment-the landlord need only establish that there has been a breach. The court will usually grant the purchaser relief from forfeiture on terms that the breach is fully rectified, so that the practical effect is that the threat of forfeiture alone may prompt the purchaser to pay off the arrears. However, a landlord must be careful not to „waive‟ his right to forfeiture after the assignment (where either there are sufficient rent arrears or a determination has been made that the service charges are payable) but before the issue and service of forfeiture proceedings, by doing something inconsistent with his desire to determine the lease. In particular, a landlord who wishes to issue forfeiture proceedings must be careful not to demand or accept rent or service charge payments from a purchaser before he does so. Any such sums paid to the landlord should be returned to the purchaser with a letter explaining why this has been done.

Our newsletter is for information only, and is not intended to be nor is it a substitute for legal advice. If you have any questions that arise from our article, please do not hesitate to contact Gabriel Alterman at gabriel@altermans.co.uk or on 020 8346 1777