Service Charge Arrears When Selling: Who Pays What

Service charges are a fact of life for leasehold flat owners. They fund the upkeep of the building, communal areas, and shared services. But what happens when you decide to sell your flat and you have outstanding service charge arrears? Or what if there are charges you dispute?

This guide explains how service charge arrears are handled during a leasehold flat sale, who is liable for what, and the practical steps you should take to ensure arrears do not delay or derail your transaction.

What do service charges cover?

Service charges are payments made by leaseholders towards the cost of managing and maintaining the building and its common parts. The exact items covered depend on your lease, but they typically include:

• Building insurance. The buildings insurance policy is usually arranged by the freeholder or managing agent and the cost is passed on to leaseholders through the service charge.
• Repairs and maintenance. Day-to-day maintenance of the building fabric, roof, external walls, communal hallways, stairwells, and shared facilities.
• Cleaning and gardening. Cleaning of communal areas, window cleaning, and maintenance of shared grounds and landscaping.
• Management fees. The fee charged by the managing agent or management company for administering the building.
• Reserve or sinking fund contributions. Regular payments into a fund that covers future major works, such as roof replacement, lift refurbishment, or external redecoration.
• Utilities. Shared electricity for communal lighting, heating of common areas, and water for shared facilities.
• Major works. Larger one-off projects such as cladding remediation, structural repairs, or lift replacement. These are usually subject to Section 20 consultation requirements.

Your lease sets out the mechanism for calculating your share of these costs. In most cases, the cost is split between all leaseholders in the building according to a fixed proportion (often based on floor area or a simple equal split).

What happens to service charge arrears when you sell

The fundamental principle is straightforward: the seller is liable for all service charges that relate to their period of ownership. The buyer does not inherit the seller's arrears.

In practice, this means:

• Any service charge demands that were due during your ownership and remain unpaid must be settled before or on completion.
• Your solicitor will typically arrange for arrears to be deducted from the sale proceeds on completion day, so the managing agent is paid directly from the funds passing through the solicitor's hands.
• If the arrears exceed the net sale proceeds (extremely rare, but possible with very large major works levies), you would need to fund the shortfall from your own resources.

The buyer's solicitor will insist on confirmation that all arrears are cleared or will be cleared on completion. This is a standard condition and no buyer's solicitor will allow their client to complete without it.

Apportionment explained

As well as clearing any arrears, service charges must be apportioned between the seller and buyer based on the completion date. Apportionment ensures each party pays only for the period during which they owned the flat.

How the calculation works

Service charges are typically billed in advance for a set period (often quarterly or annually). If the service charge year runs from 1 April to 31 March and completion takes place on 1 October:

• The seller is responsible for 1 April to 30 September (183 days).
• The buyer is responsible for 1 October to 31 March (182 days).

If the seller has already paid the full year's charge, they receive a credit in the completion statement for the buyer's portion. If the seller has not yet paid the charge for the current period, the amount is split and the seller's share is deducted from the sale proceeds.

Complications with apportionment

Apportionment is usually straightforward, but complications can arise in certain situations:

• Estimated charges. If the service charge for the current year has not yet been finalised (which is common when the managing agent issues demands based on a budget rather than actual costs), the apportionment is based on the estimated figure. An adjustment may be needed later when final accounts are issued.
• Supplementary charges. If a large supplementary charge is expected (for example, to cover the cost of major works), the solicitors will need to agree how this is handled. A retention may be held from the sale proceeds to cover the seller's anticipated share.
• Different billing cycles. Some managing agents bill quarterly, others half-yearly or annually. The apportionment must align with the actual billing period, which your solicitor will check against the LPE1.

How the LPE1 discloses arrears

The LPE1 (Leasehold Property Enquiries) form is the standard disclosure document for leasehold sales in England and Wales. It is completed by the managing agent or freeholder as part of the leasehold management pack and covers a wide range of financial and management information about the building and the individual flat.

The LPE1 includes specific questions about the seller's payment record:

• Whether there are any outstanding arrears on the seller's account, including the amount and the period they relate to.
• Whether the seller is up to date with ground rent payments.
• Whether there are any legal proceedings or county court judgments relating to unpaid charges.
• Whether there are any additional charges anticipated but not yet demanded (such as a forthcoming major works levy).

The managing agent is obliged to answer these questions honestly and accurately. If you have arrears, they will be stated clearly on the LPE1. There is no way to hide them, and attempting to do so would amount to misrepresentation. For a full explanation of the management pack and what it contains, see our guide to the leasehold management information pack.

What the buyer's solicitor checks

The buyer's solicitor will review the LPE1 and supporting documents carefully, paying close attention to the following:

If the buyer's solicitor has concerns about any of these areas, they will raise enquiries with your solicitor. Each round of enquiries typically adds one to two weeks to the conveyancing timeline, so providing clear, comprehensive information upfront is the best way to keep the sale moving. For more on how the management pack cost is calculated, see our guide on leasehold management pack costs.

Reserve and sinking fund contributions

Most well-managed buildings operate a reserve fund (sometimes called a sinking fund). Leaseholders contribute to this fund through their regular service charge payments, and the money is set aside for future major expenditure such as roof replacement, lift refurbishment, or external redecoration.

Key points for sellers to understand:

• Contributions are not refundable. Reserve fund payments you have made belong to the building's fund, not to you personally. When you sell, you do not receive a refund of your accumulated contributions.
• The buyer benefits from the existing fund. A healthy reserve fund is a positive selling point because it reduces the likelihood of the buyer facing large supplementary charges shortly after purchasing. This is reflected in the property's market value.
• Outstanding reserve fund contributions are treated like arrears. If you owe reserve fund contributions, they will appear on the LPE1 and must be settled in the same way as regular service charge arrears.
• A low reserve fund balance may concern the buyer. If the reserve fund is depleted or insufficient for planned works, the buyer's solicitor may raise enquiries about future financial commitments.

How arrears can delay your sale

Service charge arrears do not prevent a sale from proceeding, but they can slow it down significantly. Here is how arrears typically create friction in the conveyancing process:

1. Additional enquiries. The buyer's solicitor will raise questions about the reason for the arrears, the exact amount, and how they will be settled. This triggers at least one extra round of correspondence.
2. Lender concerns. If the buyer is purchasing with a mortgage, the lender may want confirmation that arrears will be cleared before releasing funds. In rare cases, significant arrears (or evidence of widespread arrears in the building) may delay the mortgage offer.
3. Completion statement complexity. Arrears make the completion statement more complex because the solicitor must calculate the exact amount to be retained from the sale proceeds, factoring in both the arrears and the apportionment.
4. Managing agent delays. If the managing agent has commenced debt recovery proceedings (such as a county court claim or a forfeiture notice), the proceedings need to be resolved or stayed before completion can take place.
5. Buyer anxiety. Arrears can make buyers nervous, particularly if they are large or if there are signs that the building is poorly managed. A concerned buyer may try to renegotiate the price or, in extreme cases, withdraw from the transaction.

According to the Leasehold Advisory Service (LEASE), payment disputes and arrears are among the most common issues that cause delays in leasehold flat sales. The more transparent you are about the situation and the clearer the plan for settling the arrears, the less disruption they will cause.

What if you disagree with the charges?

Leaseholders in England and Wales have a statutory right to challenge service charges they believe are unreasonable. This right is set out in Section 27A of the Landlord and Tenant Act 1985, which allows any party to apply to the First-tier Tribunal (Property Chamber) for a determination on whether service charges are reasonable and properly payable.

The Section 27A challenge process

If you believe your service charges are excessive, have not been properly incurred, or do not comply with the terms of your lease, you can apply to the tribunal. The process involves:

1. Making an application. You apply to the First-tier Tribunal (Property Chamber) using form T27. The application fee is currently between £100 and £300, depending on the amount in dispute.
2. Providing evidence. You must set out which charges you are challenging and why. This might include evidence that the work was not carried out, that the cost was excessive compared with market rates, or that the correct consultation procedures were not followed.
3. A hearing or paper determination. The tribunal may hold a hearing or decide the case on the papers alone, depending on the complexity and the parties' preferences.
4. The tribunal's decision. The tribunal determines whether the charges are payable and, if so, in what amount. The decision is legally binding.

Timing considerations for sellers

A Section 27A application is a legitimate and effective remedy, but it is not a quick process. Applications typically take three to six months to resolve, and complex cases can take longer. This means that if you are in the middle of selling, a tribunal challenge is unlikely to be resolved before completion.

If you have a genuine dispute over service charges and you are selling, the pragmatic options are:

• Pay under protest. Pay the disputed charges in full, noting in writing to the managing agent that you are paying under protest and reserving your right to challenge them. You can then pursue the tribunal application after the sale completes.
• Negotiate a settlement. Approach the managing agent or freeholder to negotiate a reduced payment in full and final settlement of the disputed amount. This avoids the cost and delay of a tribunal application.
• Arrange a retention. Your solicitor can hold a portion of the sale proceeds in escrow until the dispute is resolved. This gives the buyer's solicitor comfort that funds are available while the matter is determined.

Practical steps for sellers with arrears

If you have service charge arrears and you are planning to sell, here is a step-by-step approach to minimise delays and keep your transaction on track:

1. Contact your managing agent for a statement. Request a full account statement showing all charges, payments, and the current balance. This gives you a clear picture of what you owe before you go to market.
2. Clear the arrears if you can. The simplest and most effective step is to pay the outstanding balance in full before listing your property. This removes a potential source of delay and buyer concern from the outset.
3. If you cannot pay immediately, set up a payment plan. Some managing agents will agree to a payment schedule. Having a plan in place demonstrates good faith and gives your solicitor something concrete to report to the buyer's side.
4. If you dispute the charges, take legal advice. Speak to your solicitor about whether a Section 27A challenge is appropriate and how to handle the disputed amount during the sale. A solicitor experienced in leasehold law can advise on the best approach. See our guide on selling a leasehold flat for choosing the right solicitor.
5. Order the management pack early. Order the leasehold management pack before you list the property. Having the LPE1 in hand means you know exactly what the managing agent will disclose to the buyer's side, giving you time to address any issues.
6. Be transparent with your solicitor. Make sure your solicitor is fully aware of the arrears from the outset. They can then draft the completion statement to include the necessary deductions and handle any enquiries from the buyer's solicitor promptly and accurately.
7. Check for other potential liabilities. While you are reviewing your account, check whether there are any upcoming major works levies, Section 20 notices, or other anticipated charges that could also affect the completion statement.

How the completion statement handles arrears

On completion day, your solicitor prepares a completion statement that sets out all the financial adjustments between you and the buyer. For a leasehold sale with service charge arrears, the statement will typically include:

The managing agent will usually provide a completion apportionment statement a few days before the scheduled completion date, confirming the exact figures. Your solicitor will use this to finalise the completion statement.

Forfeiture risk: when arrears become serious

In extreme cases, persistent failure to pay service charges can lead to forfeiture of the lease. Forfeiture is the process by which the freeholder terminates the lease and takes back possession of the flat. Under the Commonhold and Leasehold Reform Act 2002, a freeholder cannot forfeit a lease for non-payment of service charges unless the amount owed has been determined by the First-tier Tribunal or a court, or the leaseholder has agreed the amount.

In practice, forfeiture for service charge arrears is extremely rare, and a court will almost always grant the leaseholder relief from forfeiture provided the arrears are paid. However, if forfeiture proceedings have been commenced or a Section 146 notice has been served, this will be disclosed on the LPE1 and will need to be resolved before the sale can complete. This is a serious red flag for buyers and can significantly delay or prevent a transaction.

Sources

• Landlord and Tenant Act 1985, Section 18 (meaning of service charge) and Section 27A (determination of reasonableness) — legislation.gov.uk
• Commonhold and Leasehold Reform Act 2002, Section 166 (service charge demands) and Section 167 (forfeiture restrictions) — legislation.gov.uk
• Leasehold and Freehold Reform Act 2024 — legislation.gov.uk
• LEASE (Leasehold Advisory Service / Leasehold Knowledge Partnership) — service charge guidance — lease-advice.org
• Law Society — Leasehold Property Enquiries (LPE1) form — lawsociety.org.uk
• RICS Service Charge Residential Management Code, 3rd edition — rics.org
• First-tier Tribunal (Property Chamber) — guidance on service charge applications — gov.uk/courts-tribunals/first-tier-tribunal-property-chamber
• UK Finance Lenders' Handbook — ukfinance.org.uk
• ARMA (Association of Residential Managing Agents) — best practice guidance — arma.org.uk
• Citizens Advice — leasehold service charge disputes — citizensadvice.org.uk

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