What does retention mean when buying a leasehold?

You might have heard of the word ‘retention’ during a residential property transaction and wondered what it is. Sarah Martin, experienced conveyancing lawyer and associate of Hegarty, explains what a retention means, how it affects the buyer and seller, and what questions you should ask if you get asked for a retention.

What is a retention?

A retention is a part of a conveyancing transaction where money is held back from the sale proceeds on completion and retained by the seller’s conveyancer until a further action is completed. 

Retentions are usually used when there are questions about future costs and expenditures of a property. Most commonly, retentions are used when purchasing a leasehold property or a property where there is a management company involved. Once you buy a property you become responsible for all costs associated with it, including service charges even if they were incurred prior to your ownership. Service charges are usually estimated annually in advance and the actual costs are not produced until 6-12 months following the service charge year. There is, therefore, no certainty on the final service charges until the audited accounts are produced.

Other examples of further action

• The seller may be required to complete some work to the property.
• The seller may have an outstanding insurance claim for damage to the property.
• The seller may have to get a document signed by someone else, such as a release by a third party or a landlord’s consent to alterations.

How does a retention affect the seller?

It may be the case that works to the property had been planned but no cost finalised. The buyer’s conveyancer might argue that the because the seller knew about the planned works, that they are liable for a proportion of the costs. 

Furthermore, if pre-paid service charges for works were based on estimations, but the actual cost turned out to be significantly more, the buyer’s conveyancer might argue that the low estimations distorted their perception and that the seller, due to ending up paying less service charges than they were entitled to previously, should be entitled to contribute to the final bill so the buyer is not left financially disadvantaged. 

When selling a property it is often the case that the service charge accounts for the current accounting year, and perhaps for the previous year, have not been finalised. Once they are it may be that enough service charge wasn’t paid by the seller to cover their share of the costs incurred by the Landlord or Management Company. If this happens then it would fall on the buyer to cover the cost of the shortfall. 

As the buyer would not want to pay for any shortfall owing for when the seller lived at the property, a retention is often held pending receipt of the finalised service charge accounts and then an apportionment calculated for the seller’s period of ownership.

How does a retention affect the buyer of a leasehold?

The buyer’s conveyancer may request a retention with the aim of covering any pre-agreed future liability of the seller following the transfer of ownership of the property.

This retention then gets held by the seller’s conveyancer for an agreed amount of time and when a liability demand is issued, an apportionment is calculated and agreed for the seller’s period of ownership. A payment is then made accordingly.

What you should know

In order to fully understand retentions, you should consider the following:

How much will the retention be for?

Usually, it is enough to cover any potential costs. In the case of service charges, the amount has to be a pre-agreed reasonable figure based on the historical expenditure at the property and the information given by the Landlord or Management Company. The Landlord or Management Company will occasionally advise on what the retention should be.

How long will it be held?

Your conveyancer will draft a suitable clause into the contract that states how long the retention can be held for. With this in place, the retention can be released by a certain date even if the final accounts for the service charge are not prepared. Most of the time, this is set for 6-12 months following completion.

What will happen if the buyer advises that they require the retention?

Your conveyancer will ask for evidence that proves the additional costs. Then they will calculate what part of the costs covered your ownership of the property in question. Following this, they will send the money to the buyer’s conveyancer and return any surplus from the retention back to you.

How Hegarty can help

The Hegarty team has a wealth of experience in dealing with retentions and whether you are a buyer or a seller, we will advise you as to whether a retention is necessary, the level of retention required and how long this should be held for, with the aim of making the process as easy as possible for you.