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The cost of putting safety first

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1st October 2018

The fall-out from the horrific fire at Grenfell Tower has sent shock waves across the leasehold sector. While press interest initially concentrated on social housing, it is now apparent that many private blocks also have dangerous Grenfell-style cladding.

Not only does this put leaseholders in fear of their lives, it also has serious financial ramifications. Their flats are unsellable, unmortgageable and many leaseholders face huge service charge bills to cover the cost of replacement. The Government has agreed to spend £400 million on works to social housing blocks but sadly, no such safety net is available to private leaseholders.

According to Government figures released in July, 297 private high-rise blocks have now been found to have defective cladding. Of those only 4 have so far had their cladding fully removed.

These are shocking figures but the reasons for the delay are obvious. The cost of such works is enormous and leaseholders are unsurprisingly reluctant or unable to meet them.

There have been a number of challenges to the service charges proposed by landlords to cover the cost of employing fire marshals – “waking watch” – and of replacing the defective cladding in the FTT. So far, no leaseholder has successfully persuaded the Tribunal that he is not liable for the costs under the terms of his lease or that the costs would be unreasonably incurred – see, for example, FirstPort Property Services Ltd v various leaseholders at Citiscape, Croydon LON/00AH/LSC/2017/0435 and E & J Ground Rents No. 11 LLP v Various Leaseholders of Fresh Apartments, Salford , FTT, MAN/00BR/LSC/2017/0068. So is there is any other avenue which leaseholders can pursue to avoid huge service charge bills?

Is There Disrepair?

In the FirstPort case, the leaseholders argued that the cost of re-cladding did not fall within the service charge provisions at all because there was no disrepair. The cladding, they said, was still in the condition in which it was designed and constructed so there had been no deterioration in condition and the repairing obligation was not therefore triggered.

However, the service charge provisions in the lease went beyond an obligation simply “to repair” and allowed the landlord to recover the cost of “rectifying or making good any inherent structural defects”. The argument inevitably failed.

The “inherent defect” argument might have more chance of success where there is a less sophisticated lease but these tend to exist in older cladding-free buildings.

In most cases the success of this argument is likely to be a Pyrrhic victory for leaseholders because the landlord is likely to be under an obligation to do the works pursuant to the Regulatory Reform (Fire Safety) Order 2005 in any event. Most leases will allow for the recovery of costs incurred in complying with such fire regulations either expressly or under a “sweeping up” provision.

Developer & Insurance Avenues

One way of avoiding the service charge is to persuade the developer or freeholder to pay. Following the decision against the leaseholders in the FirstPort case, for example, Barratt Developments who had built the block 16 years earlier, agreed to step in and pick up the £2 million bill despite having no legal responsibility for the cost. Similarly, Taylor Wimpey has set aside £30m to pay for the removal of unsafe cladding on the grounds that it is “morally right” to cover the costs.

Not all developers or freeholders will be in a position to “do the right thing” in this way and, of course, many freeholders are now leaseholder owned companies.

If the block was built within the last 10 years, it should have insurance cover. The National House Building Council (NHBC) has 80% of the building insurance market and clearly has a vested interest in refusing claims. However, in the case of New Capital Quay a block of 980 flats in Greenwich, NHBC finally accepted that the development had not been constructed in compliance with building regulations. It agreed to meet the cost of works necessary to make the buildings compliant with building regulations although it remains to be seen whether this will also cover the cost of the “waking watch”.

Causes of Action

Leaseholders may also have a claim against the developer under the Defective Premises Act 1972. The Act requires any person who does work in connection with providing a dwelling (or arranges for someone else to do the work) to ensure that the work which he takes on is done in a workmanlike manner with proper materials and so that the dwelling is fit for habitation. There is a good argument that a building with cladding which is not compliant with building regulations is not fit for habitation. A claim under the 1972 Act can be made even if the developer has sold on but it must be brought within 6 years of completion of the building.

If a leaseholder bought his flat direct from the developer, he may also have a claim for breach of contract. The contract may include a warranty that the building is built in accordance with building regulations. Such claims are hampered by the fact that the cladding will usually encase the whole building not just a single flat. Not all the leaseholders will have bought direct from the developer and many will not, therefore, have a contractual claim. Again, there is a 6 year limitation period on bringing such a claim.

In June, the Secretary of State for Housing, Communities and Local Government, James Brokenshire, expressed concern regarding the slow process of re-cladding works. He said that owners were responsible for the safety of their buildings and pledged that the government would “hold them to account where they have unsafe cladding systems”. However, despite the rhetoric and criticism of the leasehold system in the popular press, no concrete solutions to the “who should pay” problem have been forthcoming. For the foreseeable future it seems likely that most of the cost of ensuring that defective buildings are made safe will fall at the door of leaseholders.

This Article was published in the Estates Gazette on 29^th September 2018.

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