The Building Safety Act 2022 (the Act) came into force on 28 June 2022. It created new financial protections around the cost of remediation of historical safety defects for leaseholders of buildings at or above 11 metres or five storeys with historical safety defects.
While flat owners who benefit from this protection will welcome this unfortunately there are problems around the conveyancing process as it adjusts to the effect of the complex new rules which may adversely affect the sales process and the Government overlooked the effect of the legislation on flat owners extending their leases.
So what are the protections, problems around the conveyancing process and lease extensions and are there potential solutions/situations in which it does not apply?
The Act is aimed at ensuring builders of defective buildings retain responsibility for remedying them and that leaseholders are protected in law from the cost of remediating historical safety defects.
For more information around the new financial protections for leaseholders see www.gov.uk/guidance/building-safety-leaseholder-protections-guidance-for-leaseholders
All participants in the process have reacted and this needs to bed in and adjust over time;
- mortgage providers have introduced requirements to protect their security; their valuers have set a framework of assumptions to apply when valuing for them which need to be checked;
- landlords are getting to grips with their obligations with varying levels of understanding and different approaches;
- the forms used in the conveyancing process now contain questions for the landlord and seller in this regard but adequate replies may not flow from that;
- solicitors acting for buyers and their mortgage providers now need to consider the additional information, the individual lenders requirements, seek missing information and advise.
UK Finance, the collective voice for the banking and finance industry, which most mortgage providers are members of has a central set of requirements for the purchase of a residential property (Part 1 requirements). In addition the member lenders have additional requirements (Part 2 requirements). The purchasing conveyancer has to check that these are met. That sets the bar for what properties are mortgageable. For example they have requirements around the length of a flat lease and the ground rent pattern.
For this Act the Part 1 requirement state that they must obtain the following information about the safety of the building:
- Confirmation as to whether the building has been or will be remediated under the Act.
- Copies of any “Landlord’s Certificates” (LC) and “Leaseholder Deed of Certificate” (LDC) (there are required forms set by Regulations) and confirmation the later has been submitted to the landlord.
Unfortunately absent the lender stating in Part 2 that this can be ignored in respect of buildings that don’t engage the Act it can cause conveyancing solicitors to require this whether or not the Act applies to the Building so potentially slowing down transactions unnecessarily.
The Law Society maintain a set of industry standard questionnaires to be completed by sellers and their landlords. They now include questions around the Act but unfortunately often flat sellers are not sufficiently expert to understand the implications and so answer the questions correctly and they may not seek advice so further enquiries need to be made. Landlords approach varies and they are not obliged to provide the information.
Surveyors’ professional body RICS has agreed a method of valuation with lenders, i.e. where they have incomplete information (as is likely to be the situation in many instances unless they dig for the information needed and hold of reporting until this is forthcoming) they can value based on various assumptions (unless the lender says otherwise) including that (Valuation approach for properties in multi-storey, multi-occupancy residential buildings with cladding - 1st edition, December 2022):
– The seller is a qualifying leaseholder and their liability for remediating building costs is capped as defined in the Building Safety Act.
– Only costs capped in accordance with the Building Safety Act will be passed to leaseholders, and that works required will only cause a temporary disruption and have no material impact on value.
– There is no eligibility by the building owner to pass any building defect costs on to qualifying leaseholders.
Further “Future value and saleability may be affected in relation to the wider market until remedial/mitigation works are fully completed, but this impact is assumed to be temporary and has been ignored for valuation purposes.”
So where that occurs lenders and buyers need to be told if the assumptions are not correct and it will then need the valuers to consider the matter further.
So delays may ensue as:
- Everyone in the process gets to grips with this and the necessary information is obtained and considered where relevant.
- Conveyancers may insist on information in respect of buildings that the Act doesn’t apply to as a result of lenders requirements i.e., that the seller submit a LDC and obtain an LC in cases where the Act does not apply.
- Surveyor’s revalue for a reality not meeting the assumptions made for the lender and buyer to decide how they wish to proceed.
- The temptation for participants trying to settle processes that work in all matters will be to require the maximum comfort without assessing in detail whether in a given matter this is actually required.
- It may be difficult to obtain the relevant information from a seller or their landlord or in years to come to work out whether a given flat lease qualifies for example.
- There will be issues around interpretation of this new legislation that has not been settled via case law.
- The surveyor and lender’s may take time to consider matters where reporting is necessary.
- All of this will incur professional costs that the buyer is likely to end up having to cover.
The government accepts that the protection of the Act is lost if you take a new lease after 14th February 2022 (as you would when extending your lease usually).
They “expect landlords to make sure that lease extensions and variations reflect a qualifying leaseholder’s current protections.” and advise that “leaseholders ..seek legal advice and seek to come to agreements with landlords to apply the same protections as contractual terms” and they “encourage leaseholders to write to the department ..providing the details of landlord practice, any relevant correspondence, and contact details.” but of course landlords may refuse and in any event there is no industry accepted form of provision to include in a lease to give effect to this.
They are looking to “legislate to resolve this issue as soon as Parliamentary time allows” however this may not happen for some time and it may not be retrospective in effect.
So flat owners are left having to work out whether they currently have the protection of the Act and if so whether they wish to embark on a statutory claim that may result in them losing that protection.
They may be pushed by that uncertainty into seeking to negotiate leases outside the statutory process and so accepting a higher premium to persuade the landlord to treat.
Solutions? - 9 situations in which the Act is not engaged
The Act may not apply so the first step is to establish this; The benefit of the protections offered by the Act are limited to:
So it does not apply for example where:
- the building is less than 11 metres in height and has no more then four storeys
- there is only one dwelling in the building
- it is a leaseholder-owned building
- the flat lease is not more than 21 years in length
- the lease contains more than a single dwelling
- there is no service charge (maisonette leases)
- the lease was granted after 14 February 2022
- on 14 February 2022 the flat owner didn’t occupy the dwelling as their only or main home and they owned more than 3 dwellings in the United Kingdom in total.
- a defect doesn’t meet the definition of a ‘relevant defect’; ie it doesn’t/hasn’t:
put people’s safety at risk from the spread of fire, or structural collapse
arisen from work done to a building, including the use of inappropriate or defective products, during its construction, or any later works (such as refurbishment or remediation)
been created since 28 June 1992
relate to at least one of the following types of works:
the initial construction of the building,
the conversion of a non-residential building into a residential building, or
any other works undertaken or commissioned by or on behalf of the building owner.
For sellers and their advisors, it is important to gather the documentation at an early stage so that issues can be addressed as early as possible.
For those extending their lease that stand to lose the benefit of these protections they need to consider whether they can wait (perhaps the remaining term is well above 80 years). They should factor into this the Government’s stated intention to reform the process to make is cheaper and easier for leaseholders to extend their lease https://www.ashleywilson.co.uk/blog/23/buying-your-freehold-or-extending-your-lease
Mark Vinall, Senior Partner, Ashley Wilson