Written by the Brady Solicitors Litigation Team. Brady Solicitors advises managing agents, freeholders, leaseholders, RTM companies and RMC directors on service charge recovery, block management disputes, and residential leasehold litigation.
When a managing agent loses a block, the outgoing agent must hand over the service charge and reserve funds, which are held on statutory trust under section 42 of the Landlord and Tenant Act 1987, together with the records the freeholder needs to meet its own legal obligations and whatever else the management agreement specifies. Beyond that, the position depends on the contract.
In cases where a block changes hands, the agreement is terminated, and the outgoing agent is slow to respond and reluctant to produce records, the result can be really damaging. Arrears go unchased because the debt history has not been transferred, accounts are incomplete because the bank statements are with the previous agent, and contact details are wrong because no audit trail came across.
This guide sets out what the law and the RICS Service Charge Residential Management Code require when a block changes managing agent, what should be transferred, and what to do when the outgoing agent will not cooperate.
What does the management agreement require on handover?
The management agreement is the primary source of the outgoing agent’s handover obligations. Most professional agreements include termination provisions specifying what the agent must return, in what form, and by when. That clause is the first document to read when a management change is anticipated or underway.
In practice, the quality of those provisions varies. Some specify the documents to be returned, the data to be transferred, the bank accounts to be closed or novated, and a deadline. Others say only that the agent will cooperate with the transition, which gives the freeholder or incoming agent very little to hold them to. If the termination provisions are specific and the outgoing agent is not complying with them, that is a breach of contract. A letter before action setting out precisely what the agreement requires and what has not been provided is the first step, and in our experience resolves most non-cooperation without proceedings.
Service charge funds: The section 42 trust
Under section 42 of the Landlord and Tenant Act 1987, service charges paid by leaseholders are held on trust: to meet the costs for which they were collected and, subject to that, for the benefit of the contributing leaseholders. They do not belong to the managing agent, and they do not belong to the freeholder or RMC either. An agent holding service charge funds at the point of termination has no right to keep the balance as security for a fee dispute, and the management agreement cannot override that.
Management fees properly due and recoverable under the lease are a legitimate service charge cost, and an agent is normally entitled to settle them from the fund as they fall due. What an agent cannot do is retain the balance against disputed fees or termination charges. A claim for those sums lies against the freeholder or RMC; setting it off against trust money is a breach of trust. The RICS Code expects uncommitted service charge funds and a statement of account to be handed over promptly on termination.
The handover of service charge and reserve fund balances is therefore not negotiable, and withholding funds is the strongest ground on which to seek urgent legal intervention.
Which financial records must transfer to the new managing agent?
The records that need to transfer at a change of managing agent are not limited to the final set of accounts. They include:
- Bank statements for all service charge and reserve fund accounts for the whole period of the agent’s management, to reconcile balances and confirm that the trust fund position is accurately reflected in the handover accounts.
- Invoices and receipts for all expenditure in the service charge period, without which a section 22 request cannot be answered.
- Service charge budgets and demand schedules, which establish what was demanded, when, and on what basis, are essential to any arrears work the incoming agent picks up.
- Arrears schedules with a full payment history for each leaseholder. This is the record from which enforcement decisions are made. Without it, the incoming agent cannot assess the position on aged debt, identify which demands were validly served, or advise on what is recoverable. Dates matter too: as explained in our article on service charge arrears.
Leaseholder contact details and addresses for service
Every leaseholder’s correspondence address, and the audit trail showing how that address was established and when it was last confirmed, must transfer with the management.
This is not an administrative convenience. It is a legal necessity. Valid service of a demand or notice depends on the address used. Many leases adopt section 196 of the Law of Property Act 1925, under which a notice is sufficiently served if left at the leaseholder’s last known address or at the flat itself, but whether and how that applies depends on the lease. If the incoming agent cannot show how an address was established, and it turns out to be wrong, demands served to it may be challenged.
Two further points. Every demand must state the freeholder’s own name and address under section 47 of the Landlord and Tenant Act 1987; an agent’s address does not satisfy it. Separately, section 48 requires the freeholder to have given an address in England and Wales for service of notices, often the managing agent’s office. If that was the outgoing agent’s, a fresh section 48 notice is needed, and until then service charges are treated as not due. Leaseholder records are also personal data processed on the freeholder’s behalf: the outgoing agent should return or delete them at the end of the engagement, not retain them as leverage.
Disputes, payment plans and live proceedings
Where a leaseholder is in dispute with the freeholder or outgoing agent, the incoming agent needs a written record of what it is about, what position the freeholder has taken, and whether any concession or undertaking has been given. An incoming agent who contradicts something the outgoing agent agreed will find the leaseholder holding them to it.
Payment plans need to transfer in writing, with the full terms. As set out in our separate article on payment plans, an informal plan that exists only in the outgoing agent’s email history leaves the incoming agent unable to say what was agreed, whether any rights were reserved, or how each instalment relates to each demand period.
Where solicitors have been instructed by the outgoing agent on arrears or a dispute, the incoming agent needs to know. The solicitors’ file will usually belong to the client (the freeholder or RMC, not the agent), and instructions should transfer, or proceedings stall, costs are wasted and judgments go unsatisfied.
What can you do if the outgoing agent refuses to hand over?
If an outgoing agent is not cooperating, the options depend on what is being withheld.
For service charge funds, the trust obligation under section 42 of the Landlord and Tenant Act 1987 is the clearest legal basis. A solicitor’s letter citing section 42 and requiring transfer within a defined period, failing which proceedings will follow, is usually effective: few agents want to defend a claim that they misapplied trust property.
For documents and records, the contractual route is the first step. Where the agreement is specific and the agent is in breach, the remedy is a claim for breach of contract and an order for delivery. Where the agreement is vague, the position is harder but not hopeless: an agent owes its principal duty to account and to deliver up the principal’s documents when the agency ends, and the Code, admissible before courts and tribunals, expects a professional handover. In urgent cases an interim injunction can be sought.
We suggest taking legal advice before the transition, not after a problem has arisen. The window in which an incoming agent can credibly press for complete records is short, and once several months have passed the problems become yours regardless of who created them. Before the handover date, confirm that the following are in place:
- A handover clause in the management agreement with a list of deliverables and a deadline.
- Transfer of all service charge and reserve fund balances, with accounts to the handover date.
- Bank statements, invoices, budgets, demand schedules and full arrears histories.
- Leaseholder addresses with the audit trail, and a fresh section 48 notice if the address for service is changing.
- A written schedule of disputes, payment plans and live or contemplated proceedings.
If you are dealing with a management transition that is not going smoothly, or are taking on a block and have concerns about the completeness of what you are receiving, please do get in touch and one of our team will be happy to help.
Frequently Asked Questions
Can an outgoing managing agent withhold service charge funds until its fees are paid?
No. Service charge funds are held on trust under section 42 of the Landlord and Tenant Act 1987 and are not the agent’s property. Fees properly due under the lease can be paid from the fund as they fall due, but the balance cannot be retained as security for disputed fees or termination charges.
Who owns the service charge records when a managing agent is replaced?
The client: the freeholder, RMC or RTM company. The RICS Service Charge Residential Management Code states that records of demands, accounts, arrears, invoices and leaseholder files belong to the client and should be handed over on termination.
How quickly must an outgoing managing agent hand over?
The management agreement sets the timescale. The RICS Code expects a professional and prompt handover, with uncommitted funds and accounts prepared to the handover date. Where no timescale has been agreed, a solicitor’s letter should set one.
Can the First-tier Tribunal force a managing agent to hand over records?
No. Leaseholders’ information rights under sections 21 and 22 of the Landlord and Tenant Act 1985 are enforced by prosecution under section 25, and the client’s remedy against the agent is a county court claim for breach of contract, an account and delivery up, with an interim injunction in urgent cases.
