Conveyancing service charge apportionments and retentions

Overview

What is a service charge apportionment?

 

When a freeholder or management company arranges for shared maintenance and repairs of a building or estate this is usually charged back to the property owners on a monthly, quarterly or annual basis and an annual statement is usually produced.

When the property is sold the contract usually specifies that seller is responsible for service charge costs up until the date of completion and the buyer becomes responsible from that date. In most cases, the date of completion falls before or after the service charge annual statement date and it becomes necessary to “apportion” the costs between the seller and buyer. This simply means we calculate who is responsible for the costs based on the dates of ownership.

For shared ownership properties, the landlord will send completion statements to both solicitors detailing how much each party (seller and buyer) is to pay on completion. In other leasehold transactions, the apportionment is done by the seller’s solicitors.

What is a retention and why is it requested?

In most leases or transfers once you buy a property you become responsible for all costs associated with the property. This includes the service charges even if they were incurred before your ownership. The freeholder/ landlord is not a party to the contract between the buyer and seller and will hold the new owner responsible for all costs.

This issue is that the service charge statement is usually an estimate in most cases, so at the time when the apportionment is calculated, the actual costs due for the property are not known. Usually, they are produced or calculated a year later depending on how efficient the management company is. It is not uncommon for it to take longer than this and in some cases, may be delayed for 2 years or more.

Because the final costs are not known it has become common practice for buyers to request a “retention”. This means the seller’s solicitor will be asked to retain a sum of money agreed between both parties so that this can be paid directly to the buyer once the buyer produces evidence that it is due.

As there is no real way of knowing what the final figure will be both sides try to agree on a reasonable figure based on the historical expenditure at the property and the information given by the management company. The retention is usually held by the seller’s solicitors until the final accounts for the previous service charge year is issued.

The agreement for retention is usually detailed within a “retention rider” which is appended to the contract for sale

What if the seller does not agree to a retention?

 

In some cases, sellers are not willing to agree to any retention whatsoever on the basis that if a credit occurs due to an underspend it will be credited to the service charge and there’s no way for them to reclaim it. When it comes to agreeing on a retention, the situation differs for each transaction. It is based on negotiation between the purchaser and the seller and what either party is ultimately willing to allow.

It is ultimately a question of negotiation and bargaining power and some buyers might choose to proceed without a retention rather than risk losing the property.

In some rare cases, the seller may refuse the retention but opt for a “clean break allowance”. This means an allowance will be given off the purchase price such that if any deficits occur the purchaser will be liable for it and cannot pursue the seller further.

When buyers proceed without a retention our advice is that even though the buyer might be contractually entitled to a contribution from the seller, it can sometimes be difficult to chase the seller or recover funds after the fact once the seller has moved on.

As conveyancers, we do not get involved in litigation and the buyer might need to sue the seller via the court system to force the seller to pay their share which might be time-consuming and frustrating.

Do you have a conveyancing or property query? Please contact us property@olaleslie.com or call 02071830084 

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