The issue of how remedial works and interim measures will be funded is an emotive and challenging one, with many competing interests at play. Brady Solicitors’ Adam Fotiou reviews the options for freeholders and managing agents seeking to fund these essential works.
Owners and developers who had installed cladding in good faith are refusing to pay for remedial works and many are looking to the leaseholders to fund these works under their service charge, should the leases to the flat permit them to do so.
However, leaseholders are inevitably (and understandably) aggrieved; they purchased their flats in the comfort of knowing the building regulations designed to protect their safety and the certification by local authorities of a building’s compliance with those regulations were both fit for purpose. The individual costs of the remedial works through the service charge will likely be life-changing for many.
The government has adopted the stance that leaseholders should not pay, yet in the absence of adequate government intervention, freeholders, managers and leaseholders are left no wiser as to how to fund this urgent and essential work.
As with any obligation of a landlord and manager, as well as any item of service charge, the wording of the lease to the flat will be crucial as to determining what is required or permitted and it will need to be clear and unambiguous in this respect. However, the usual problem exists that the wording of leases is not standardised and so applying the same approach to all cases is not possible.
In the two plus years that have elapsed since Grenfell, there has yet to be a legal precedent handed down by a ‘higher court’ (i.e. the Upper Tribunal or Court of Appeal, for instance) that would helpfully bind all First-Tier Property Tribunals and County Courts as to what wording in a lease would:
- Require landlords and managers to repair and replace cladding and balcony materials deemed a fire risk, as well as supply the interim measures previously mentioned, and;
- In turn allow the costs of the same to be recovered from the service charge.
However, there have indeed been cases before the Tribunal that have adjudicated that, based on the wording of the leases of those affected flats, the remedial works and interim measures were required to be performed by the landlord and manager and such costs were recoverable from the service charge.
An interesting approach of the Tribunal has been that, where a building has to be kept in ‘good repair and condition’ by the landlord or manager (and the costs of doing so are recoverable through the service charge), it cannot be considered as such if any of the materials in its construction are deemed to be fire risks.
Whilst each case would need to be considered on its individual merits, these decisions are helpful guidance for landlords and managers in evaluating whether the wording of the leases before them is likely to permit the recovery of these costs through the service charge.
Should the leases permit the recovery of costs through the service charge, managers are still put in an unenviable position; the works cannot of course be performed without sufficient monies being collected in advance to cover their full cost, but there are two issues that would likely arise:
- The timing of the collection of those monies will be limited by the lease; is it restricted to the timing of the demands for the budgeted service charge for the accounting year ahead, or does the lease permit additional demands to be raised during the accounting year should the need for additional funding arise? The findings of a fire risk assessment and any pressure from the Fire Service or local authority will render the works as urgent and funding therefore needs to be in place in an equally urgent fashion. If a loan is necessary to cover the cost, are interest and bank charges recoverable under the service charge in accordance with the wording of the leases?
- The sums required from leaseholders for the works alone will likely be thousands and it is therefore almost inevitable that some will simply be unable to pay.
Transparency and clear and detailed communications to residents could therefore be crucial in facilitating payment through preserving goodwill in challenging circumstances and helping leaseholders understand why, in legal terms, the landlord or manager must perform the works and that the costs can, and have to be, recovered through the service charge. A leaseholder who is simply withholding payment out of emotion may be reassured if the efforts being made to restore the safety of their homes and mitigate their financial exposure is clearly communicated.
It is also essential that, on the back of the fire risk assessments, appropriate experts are engaged to produce clear method statements as to the full extent of the works required and their likely costs. Can you clearly demonstrate that you are mitigating the cost of any interim safety measure in the meantime?
- Have the cost and viability of all recommendations out of the fire risk assessment and/or the Fire Service/local authority been considered?
- If you are supplying a waking watch, have you tested the market for a capable supplier at a competitive cost?
- Is the extension of the existing communal fire alarm system into the flats a cheaper long-term option (should the expert advice be that it will negate the need for the waking watch)?
An overview of the above options would be important in seeking dispensation from the statutory consultation requirements for ‘major works’ i.e. where the contribution of any one resident to a set of works exceeds £250 (a threshold likely to be easily reached in these circumstances); consultation is a process typically lasting at least three months and difficult questions would be asked of landlords and managers if urgent fire safety works are delayed where the option exists for consultation to be dispensed with.
Tribunals have commonly permitted dispensation for such works.
Leaseholders should also be encouraged to seek their own independent legal advice as to their potential individual claims against the developer, should they be the original purchaser.
Equally, a pre-emptive application to the Tribunal for a determination as to the ‘reasonableness’ of the cost of the works, and their ‘payability’ by the leaseholder to the landlord or manager, is also a highly transparent step and has the benefit of providing, in the absence of any appeal overturning the decision, a definitive legal answer by which all parties can proceed with confidence as to their respective positions.
As part of this transparent approach and for the sake of diligence, the eligibility for NHBC warranty cover and the availability of insurance should be investigated. In terms of any warranties, the ten-year NHBC cover should take care of the costs of remedying what would be an inherent defect in the construction of the building, but unfortunately not of any waking watch service. In terms of insurance, buildings insurance policies taken out by landlords and managers are typically not engaged for inherent defects in the construction of the building. However, it is recommended that all checks are made for any structural defects insurance that may have been taken out by the developer or landlord.
Adam Fotiou, Property Litigation solicitor at Brady Solicitors