First time buyer and landlord - Flat bought on auction with hidden service and ground rent arrears

ashthemash

Hi I purchased a flat with in situ tenants as my first ever property and this was through an auction. I know probably a lot of you are going to say I should have sought legal advice beforehand, I should have  but it was so difficult to get hold of conveyancers in London. Everyone seemed to be very busy. Anyway, my bid got accepted and I instructed my solicitors to progress towards completion. The seller was acting as a contractual seller and not a registered seller. I was told this was a back-to-back transaction in which the seller was buying from a third seller at the same time as I was buying from them. I thought this was some way for them to save on SDLT. Anyway, their solicitors would not answer any questions as they said that we had already contracted at the auction. After much chasing up they provided some very brief responses to a few of the questions. When my solicitors were waiting for them to respond, they issues a notice to complete and charged us around £500 for the delay although it was we who were waiting for them to respond. My solicitors felt rushed to complete and finally, we managed to complete it last week.
My letting agent found out from the managing agent that there was a large amount outstanding in ground rent and service charges which the previous owners had accrued. When I spoke to the managing agent they confirmed that there were arrears but would not tell me how much it is. They also said that the sale was pending and said that the solicitors need to sort this out between themselves.  I reverted back to solicitors for advice, they did not seem to be interested and asked me to liaise with the managing agent directly and gave me a letter which says the purchase had been completed and if anyone has any questions they should contact them. 

I want to know how much trouble I am in and what steps if any I can take to ensure that this situation does not result in forfeiture of the lease. 

loubel

The time to carry out investigations was before the auction unfortunately. You may have agreed to cover service charge arrears under the auction contract or the owner may have been settling these under their contract for sale. What did the contract say? Was a leasehold pack, including details on the service charges, included in the legal pack?

You or your solicitor should serve formal notice on the freeholder to let them know you now own the flat and then you'll have to wait for them to write to you regarding any debt and get it settled pronto.

NameUnavailable

Unless 'modern method' when you buy at auction you exchange contracts immediately and the completion date is set, usually 4 weeks later but it should be stated within the conditions of sale, so I can understand their annoyance with being asked queries after the sale.

The legal pack provided by the auction company should have included details of service charges or maybe it was mentioned in the special conditions of sale, if any.

Read through the legal pack in detail. Obviously you need to find out exactly how much is due asap.

user1977

I doubt anybody can give you reliable advice without seeing the contract. Your solicitor should be able to advise on the terms of the contract, but I guess they don't regard it as being within the scope of whatever you instructed them to do.

ashthemash

loubel said:

The time to carry out investigations was before the auction unfortunately. You may have agreed to cover service charge arrears under the auction contract or the owner may have been settling these under their contract for sale. What did the contract say? Was a leasehold pack, including details on the service charges, included in the legal pack?

You or your solicitor should serve formal notice on the freeholder to let them know you now own the flat and then you'll have to wait for them to write to you regarding any debt and get it settled pronto.

NameUnavailable said:

Unless 'modern method' when you buy at auction you exchange contracts immediately and the completion date is set, usually 4 weeks later but it should be stated within the conditions of sale, so I can understand their annoyance with being asked queries after the sale.

The legal pack provided by the auction company should have included details of service charges or maybe it was mentioned in the special conditions of sale, if any.

Read through the legal pack in detail. Obviously you need to find out exactly how much is due asap.

Thank you both for your prompt responses. The legal pack did not include a number of key documents such as the lease. There was no reference to service charges or ground rent. On the special conditions document, under a section called arrears, there was a statement that there are no rent arrears. 

I emailed the management company the letter from my solicitors confirming the purchase and asked them to contact me if they need any information from me. Do I need to write to the freeholder as well?

ashthemash

This is from the special conditions section but I am not sure if any of this makes me liable for their outstanding debt.

The TRANSFER is to contain the following provisions:

1. The covenants implied under Section 2(1) (b) of the Law of Property (Miscellaneous Provisions) Act 1994 (“the Act”) are varied by the deletion of the words “at his own cost” and the substitution of the words “at the cost of the person requiring compliance with this covenant”.

2. The covenant implied by Section 3(1) of the Act applies only to charges or encumbrances created by the Transferor.

3. For the purposes of Section 6(2) (a) of the Act all matters now recorded in registers which are subject to public inspection are to be considered within the actual knowledge of the Transferee.

4. The Transferee covenants with the Transferor to observe and perform the covenants restriction and other matters contained or referred to in the Property and Charges Register of Title Number [ reference removed] and the Transferee hereby indemnifies and keeps the Transferor fully and effectively indemnified against all losses, costs, claims, liabilities, proceedings and demands whatsoever arising from any breach of such provisions.

5.

(i) “The covenants by the Transferor as to repairs and decoration implied by the Law of Property (Miscellaneous Provisions) Act 1994 shall not apply to this Transfer and the Transferee and the Transferor accordingly apply to the Registrar to enter in the Register a note that the implied covenants are qualified as above”.

(ii) “The Transferee hereby covenants with the Transferor from the date of this Transfer to pay the rents and other moneys reserved by the registered lease and to observe and perform the covenants and other stipulations and obligations contained mentioned or referred to on the part of the Lessee in the registered lease and will indemnify the Transferor and their estate and effects from and against all actions claims costs and demands received from any future breach non-observance and non-performance thereof”.

(iii) “The covenants by the Transferor as to repairs and decoration implied by the Law of Property (Miscellaneous Provisions) Act 1994 shall not apply to this Transfer and the Transferee and the Transferor accordingly apply to the Registrar to enter

eddddy

ashthemash said:

 The seller was acting as a contractual seller and not a registered seller. I was told this was a back-to-back transaction in which the seller was buying from a third seller at the same time as I was buying from them. I thought this was some way for them to save on SDLT. 

I wonder if it was a "we buy any house" type company - they use back-to-back contracts like that. (They often prey on people in financial difficulties, which would explain the ground rent and service charge arrears.)



It sounds like you're in a difficult situation. I'm guessing this is the situation...

• Your solicitor needs to serve a 'notice of transfer' or 'notice of assignment' on the freeholder (or management company) to say that you are the new owner of the flat.

• The freeholder (or management company) will only accept a 'notice of assignment' if a fee is paid and all ground rent arrears and service charge arrears are paid off

• Normally, it would be in the sales contract that the seller's solicitor would pay those off, but it sounds like it wasn't in your contract.

• As no 'notice of assignment' has been accepted, the freeholder (or management company) don't recognise you as the owner - so they won't discuss the arrears with you.

• And there are legal reasons why the freeholder (or management company) might refuse to accept any arrears payments from you. (Accepting a payment could mean that they recognise you as a tenant/leaseholder by default).

• If the original seller approached the management company - they would discuss it with them, and accept payment from them. But I suspect the original seller is no longer interested in getting involved or helping you out.

Perhaps your best bet is to 'plead' with the management company - they could probably bend the rules to solve this if they wanted to. But they don't have to.

But all the above is based on some guesses. So the issue could be completely different. And/or your solicitor might be following a different route to solve this.

Tiglet2

ashthemash said:

Hi I purchased a flat with in situ tenants were you intending to become a landlord, or do you want to live there?  as my first ever property and this was through an auction. What kind of auction?  I know probably a lot of you are going to say I should have sought legal advice beforehand, I should have  but it was so difficult to get hold of conveyancers in London.  That's a lame excuse - you can use a conveyancer situated anywhere in England.  When buying property in an auction, it is imperative (unless you are familiar with property law) that you instruct a solicitor to go through the legal pack BEFORE bidding at the auction.  This will cost a few hundred pounds and is money lost if you lose the auction, but really is essential to an auction purchase.  Everyone seemed to be very busy. Anyway, my bid got accepted and I instructed my solicitors to progress towards completion. The seller was acting as a contractual seller and not a registered seller. I was told this was a back-to-back transaction in which the seller was buying from a third seller at the same time as I was buying from them. A back to back transaction is where the registered proprietor has sold to a buyer, but the property has not been registered in the new buyer's name at the Land Registry and they are selling the property on without updating the register.  I thought this was some way for them to save on SDLT. Anyway, their solicitors would not answer any questions as they said that we had already contracted at the auction. Right, so you 'exchanged' at the auction.  Due diligence should have been done prior to the auction.  After much chasing up they provided some very brief responses to a few of the questions. When my solicitors were waiting for them to respond, they issues a notice to complete and charged us around £500 for the delay although it was we who were waiting for them to respond. My solicitors felt rushed to complete I think you were contractually bound to complete according to the contract you signed at the auction and finally, we managed to complete it last week.
My letting agent found out from the managing agent that there was a large amount outstanding in ground rent and service charges which the previous owners had accrued. When I spoke to the managing agent they confirmed that there were arrears but would not tell me how much it is. They also said that the sale was pending and said that the solicitors need to sort this out between themselves.  I reverted back to solicitors for advice, they did not seem to be interested and asked me to liaise with the managing agent directly and gave me a letter which says the purchase had been completed and if anyone has any questions they should contact them.  Unfortunately, the time for legal enquiries would have been when you saw the property and before you bid at the auction.  That is the time when your solicitor could insist on an up to date management pack being provided.  It really was in your best interests to find out as much as you could about this property before 'exchanging' on the day of the auction.  Arrears on ground rent and service charges are against the property, not the owner.  Obviously the previous registered owner would have been responsible but the time to query it was before exchange, when doing your due diligence.  Now you need to find out how much is outstanding and then take the registered owner to the small claims court for the outstanding amount.

I want to know how much trouble I am in and what steps if any I can take to ensure that this situation does not result in forfeiture of the lease. 

My thoughts in bold!

Tiglet2

As an aside, why didn't you obtain a copy of the lease from Land Registry yourself?  It costs £7 using the form OC2 and only takes a couple of days.

eddddy

Tiglet2 said:

Arrears on ground rent and service charges are against the property, not the owner. 

That's not strictly correct.

If the ground rent and service charges had been billed to the previous leaseholder, the previous leaseholder remains liable to the freeholder for them.

It's only unbilled ground rent and service charges which the new owner becomes liable to the freeholder for.

(Which is why freeholders insist that arrears are paid off before actioning a 'notice of transfer'.)

Tiglet2 said:

....then take the registered owner to the small claims court for the outstanding amount.

That raises an interesting question...

• The OP (probably) doesn't owe the money to the freeholder
• The previous owner (probably) owes money to the freeholder

If the OP chooses to pay-off the previous owner's debt, I'm not sure that gives the OP a basis for a court claim against the previous owner.

ashthemash

Tiglet2 said:

As an aside, why didn't you obtain a copy of the lease from Land Registry yourself?  It costs £7 using the form OC2 and only takes a couple of days.

LR doesn't hold a copy of the lease for this property unfortunately so they couldn't supply one. The seller has included a statement from LR to that effect.