Articles

Building Safety Charges: The New Law

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21st September 2020

Background

The Building Safety Bill 2020[1] was published on 20^th July 2020, at a time when landlord and tenant professionals were distracted by the publication of the Law Commission’s three blockbuster reports on Leasehold Reform[2]. It was therefore easy to miss the (rather more immediate) proposals in Pt.4 of the draft Bill to bring in a whole new category of statutory charges for leaseholders, akin to service charges. The proposals apply to fire safety charges for leaseholders in blocks of flats with more than 5 storeys – but they may be extended to other categories of properties in future years.

Unlike the Law Commission reports, the Bill will be law within a few short months. This article examines some of the main features of the proposals, and how they will work in practice.

The Bill as a whole is part of a raft of legislation which helps meet the government’s commitment to implement the most urgent recommendations from the first phase of the Grenfell Tower Public Inquiry and those of Dame Judith Hackitt’s review of building regulations[3]. It principally applies to any “higher-risk building”, namely a multi-occupied residential premises over 18 meters in height[4]. The substantive changes in the Bill to proposed fire safety standards and procedures are outside the scope of this article, but suffice it to say that the costs of the fire safety work to blocks of flats which and administration of the new regime are very significant indeed. The official estimate accompanying the Bill is that the cost of implementation will be between £4.381 and £8.161 billion pounds over a 15-year period[5].

Building Safety Charges

Part 4 of the Bill applies to blocks of flats which are already occupied, rather than new build. It provides a mechanism for recovering part of the costs of meeting these obligations from leaseholders. In particular, clauses 88 and 89 of the Bill amend the Landlord and Tenant Act 1985 and insert no fewer than 20 new sections numbered 17A to 17X respectively. The effect of these new provisions is to create and regulate a new statutory beast known as a “Building Safety Charge”, which will be payable by the tenants with long leases of dwellings in higher-risk buildings.

Building Safety Charges are intended to sit alongside service charges[6] and administration charges[7] as sums payable by long leaseholders to their landlords. Unsurprisingly, leaseholder representatives have been critical of the new charges they will face[8].

A drafting issue is why the provisions are quite so complicated. For over 30 years, section 28 of the Fire Precautions Act 1971 contained a simple and robust procedure for modifying leases and apportioning the expense of fire safety works[9] in a single provision. The 20 new sections which Part 4 of the Bill adds to the 1985 Act increases the length of the existing statute by over half. Quite why the draftsman chose to introduce completely new kind of statutory charge – as opposed to modifying existing service charge provisions – is unclear. This is particularly curious since many of the new provisions are clearly inspired by sections 18-27A of the 1985 Act. The thinking appears to be that the new Building Safety Charges must be kept separate from service charges, so that costs incurred on fires safety are readily identified and accounted for[10]. But the same rationale could be applied to many other categories of service charge costs.

What is a Building Safety Charge?

Section 17G(1) of the 1985 Act will provide that a landlord may, by written demand, require a leaseholder to pay a Building Safety Charge.

A “Building Safety Charge” is defined by the section 17G(2) as a charge “in respect of … building safety costs”. Building Safety Costs are in turn defined as “the costs or estimated costs incurred or to be incurred by or on behalf of an accountable person for a higher-risk building in connection with the person carrying out prescribed building safety measures”. This effectively elides the two separate definitions of “service charge” and “relevant costs” in subsections 18(1) and (2) of the 1985 Act.

Three points can immediately be made about this definition:

• There is no requirement for the landlord to have itself incurred the building safety costs. The building safety charges are payable provided costs have been incurred by or on behalf of “an accountable person”. The “accountable person” is the (controversial) figure created by clause 61 of the Bill who has the ultimate legal responsibility for safety in the building. The “accountable person” may be the landlord, a managing agent or even a leaseholder. But the definition makes it clear that irrespective of the identity of the person who actually incurs the costs of works, it is the landlord who collects the Building Safety Charge.
• Section 17G(8) states that “costs” include “overheads”. The term “overhead” is not defined. But it plainly contemplates the landlord or its managing agents charging something for the supervision and administration of building safety over and above what it is entitled to charge for under the service charge provisions of the lease. Depending on one’s point of view, this is either a significant potential source of extra revenue for some landlords and their agents, or appropriate compensation for the frequently onerous management obligations relating to building safety.
• Section 17G(9) makes it clear that for accounting purposes, the Building Safety Charge should be accounted for on an annual basis. But there is no requirement for the landlord to use the same annual accounting period that it uses for the service charges.

Landlord Obligations for Building Safety Charges

Under the new section 17H, a landlord may not require the relevant tenant to pay a building safety charge unless it has given the tenant (i) details of the accounting period to be used in respect of calculating building safety costs and charges and (i) a budget in respect of the accounting period. The latter must include an estimate of the building safety costs to be incurred, and the building safety charges to be payable by the tenant. Section 17H also makes provision for additional ‘in year’ budgets where additional building safety costs are to be incurred.

Much as s.18(1) of the 1985 Act distinguishes between the tenant’s “service charge” and the landlord’s “relevant costs”, the new provisions distinguish between Building Safety Charges and “building safety costs”. The necessary apportionment of building safety costs to arrive at the Building Safety Charge for each individual leaseholder is dealt with in section 17I. The general rule is that a relevant landlord must follow the apportionments in the leases. But in section 17I(4) there is power to apply to a tribunal to vary the apportionment of building safety costs. The power to re-apportion is considerably wider (and simpler) than an application to vary a lease apportionment in Pt.IV of the Landlord and Tenant Act 1987.  The Tribunal simply has a discretion to provide a “fair method” of apportioning the costs.

Sections 17I(2)(b), 17U and 17V of the 1985 Act provide that any money received from tenants is to be held on trust. These new provisions echo and extend section 42 of the Landlord and Tenant Act 1987. The building safety charges must be held in a designated account or in two or more separate trust funds[11], and the statutory provisions override the terms of any relevant leases. A person commits an offence if the person fails, without reasonable excuse, to comply with a duty imposed on the person by or by virtue of section discussed above. If a person is found guilty of an offence under section 17W, they are liable on summary conviction to a fine not exceeding level 4 on the standard scale.

The reforms also introduce, for the first time, a specific statutory requirement for the landlord to serve end of year accounts in relation to Building Safety Charges (described as a “reconciliation statement”). The new section 17H(2)(c) sets out detailed requirements for these.

Tenant protection

Numerous provisions protect the tenant from excessive Building Safety Charges, adopting many of the safeguards for leaseholders in sections 19-30 of the 1985 Act.

First, under the new section 17H(3), the landlord may not serve a relevant tenant with a demand for building safety charges more than once in any three-month period. This is an entirely new provision without any equivalent restriction in service charge legislation.

Secondly, under section 17S, a demand for a Building Safety Charge must be accompanied by a summary of rights of obligations, mirroring the provisions of section 21B of the Act.

Thirdly, section 17Q provides an 18-month time limit on making demands for payment in almost identical words to section 20B of the 1985 Act.

Fourthly, any of the contributing tenants may by notice in writing require the landlord to afford the tenant reasonable facilities for: (i) inspecting documents evidencing compliance with the law, and (ii) taking copies of or extracts from such documents.

Fifthly, under section 17V(4) contributing tenants have a right to request copies of documents evidencing the moneys held on trust. The scheme is similar to regime which applies to summaries of relevant costs in section 21 of the 1985 Act.  If the tenant is represented by a recognised tenants’ association and the tenant consents, the notice may be served by the secretary of the association instead of by the tenant.

In many cases, a tenant may withhold payment of a Building Safety Charge if the relevant requirement is not met and the tenant cannot be liable for interest etc. until the landlord remedies its default. This applies, in particular, where there is no summary of rights and obligations. But under the new section 17V(11), the sanction also applies in certain other circumstances, such as where a tenant has “reasonable grounds for believing” the landlord has failed to hold the moneys on trust. However, it may be that such vaguely worded provisions in the Bill may not survive scrutiny and make it into the final version of the legislation.

Consultation Requirements

One of the most successful protections against excessive service charges have been the requirement for consultation in relation to major works and qualifying long-term agreements in section 20 of the 1985 Act. The new sections 17K and 17L provides there is an equivalent consultation requirement for “qualifying building safety works” and “qualifying building safety agreements”. As with section 20, details of the consultation requirements are to prescribed by the Secretary of State. A failure to consult means the tenant’s liability is capped – again to a level prescribed by the minister. Section 17L allows a tribunal to dispense with the consultation requirements, in similar fashion to the existing dispensation from consultation requirements in under section 20ZA[12].

However, an entirely new procedure appears at section 17M, which is intended to cover urgent cases. Urgent cases are required to be undertaken pursuant to a compliance notice or an urgent action notice issued by the regulator. If the section applies to the tenant, the landlord must give the tenant in the higher-risk building an exemption notice which effectively despises with consultation.

Reasonableness

One of the shorter provisions of Pt.IV of the Act is perhaps the most significant. Under section 17J:

“Building safety costs may be taken into account in determining the amount of a building safety charge payable by a relevant tenant—

(a) only to the extent that they are reasonably incurred, and

(b) where they are incurred on the provision of services or the carrying out of works, only if the services or works are of a reasonable standard, and the amount payable is to be limited accordingly.”

This adopts, almost verbatim, the provisions of section 19(1) of the 1985 Act, as they apply to service charges. There is extensive caselaw on the meaning of the term “reasonably incurred”[13] and its implementation should provide little difficulty in practice. A surprising omission is a lack of any controls over ‘interim’ Building Safety Costs, similar to the provisions of section 19(2) of the 1985 Act.

Certain costs are specifically excluded by a new section 17O of the 1985 Act. These specifically include costs incurred or to be incurred solely as a result of any penalty imposed or enforcement action taken by the regulator; costs incurred or to be incurred by reason of any negligence, breach of contract or unlawful act on the part of an accountable person and prescribed costs incurred or to be incurred in connection with the carrying out of prescribed. Similarly, under section 17P, if relevant financial support has been or is to be paid to the accountable person in respect of those works. The amount of the support must be deducted from the building safety costs and the amount of the building safety charge payable must be reduced accordingly. “Relevant financial support” includes any grant or other funding available to the accountable person for the costs of carrying out prescribed building safety measures in relation to the building.

Applications to the Tribunal

As with residential service charges, most disputes about liability to pay Building Safety Charges will be dealt with by the appropriate tribunal (i.e. the First-tier Tribunal (Property Chamber) in England and the Leasehold Valuation Tribunal in Wales). Applications may be made under the new section 17T, which follows the wording of section 27A of the 1985 Act. However, section 27A(7) makes it clear that the court retains jurisdiction in Building Safety Charge cases.

As with section 20C of the 1985 Act, section 17R provides that a tenant may make an application for an order that all or any of the costs incurred, or to be incurred, by the relevant landlord in connection with proceedings before a court, the First-tier Tribunal or the Upper Tribunal, or in connection with arbitration proceedings, are not to be regarded as building safety costs to be taken into account in determining the amount of any building safety charge payable by the tenant or any other person or persons specified in the application.

Relationship with Service Charges

One consequence of creating a separate charge is that this may well revive old jurisdictional arguments rarely encountered since the repeal of the Fire Precautions Act 1971. Where a statute provides machinery for apportioning the cost of work between various persons having an interest in premises, that machinery is generally taken as the sole method by which liability under the statute may be transferred to another person. The courts have accordingly held that the landlord’s only remedy was to apply to the county court for payment under the statute, not the lease. For example, in Horner v Franklin [1905] 1 KB 479, a lessee covenanted “to pay all the existing and future taxes, etc, assessments and outgoings of every description for the time being payable by the landlord or tenant in respect of demised premises”. The landlord provided a fire escape, and then sought to recover the cost from the lessee under this provision, but the Court of Appeal held it could only do so under the statutory machinery. Before 2005, the argument was frequently deployed by leaseholders to avoid having to make contributions to landlords’ fire safety works. A landlord who incurs “building safety costs” under the Act will therefore have to take care to include them in the Building Safety Charge – not the service charge. Tenants can argue these costs are not recoverable if the landlord gets the costs under the wrong heading. This will be a particular nightmare for landlords who incur costs expenditure on waking watches and other safety expenditure, which they may have recovered in past as service charges. That will probably be impermissible under the new regime.

It should also be said that a significant body of professional guidance has grown up around service charges, none of which currently cover the proposed charges. In particular, the RICS Service Charge Management Code (3^rd Ed) has long been treated as a benchmark for the reasonableness of service charges. Similarly, the form of service charge accounts is covered by TECH 03/11[14].

Conclusions

Pt.IV of the Bill attempts to replicate existing controls over residential service charges and to apply these controls to the new Building Safety Charges. The new statutory controls will initially apply to a relatively small number of properties. But they will govern many of the most sensitive (and probably controversial) property management projects over the next few years.

By Mark Loveday & Ibraheem Dulmeer (of Normanton Chambers)

 

[1] Published on Saturday 18^th July 2020.

[2] Leasehold home ownership: buying your freehold or extending your lease (Law Com No 392), Reinvigorating commonhold: the alternative to leasehold ownership (Law Com No HC586) and Leasehold home ownership: exercising the right to manage (Law Com No HC 393), all published on 20^th July 2020.

[3] Building a Safer Future: Independent Review of Building Regulations and Fire Safety: Final Report (Cm 9607), May 2018.

[4] The term “higher-risk building” is denied by clause 19 of the Bill, and is left to secondary legislation. But the government intends to apply the legislation (at least initially) to buildings over 18m high: see Memorandum concerning the Delegated Powers in the Bill for the Delegated Powers and Regulatory Reform Committee, MCLG, 20^th July 2020, para 5.

[5] Building Safety Bill, Impact Assessment.

[6] As defined by LTA 1985 s.18(1).

[7] As defined by Commonhold and Leasehold Reform Act 2002 Sch.1 Pt.I para 1(1).

[8] See, for example, Leaseholders hit out at UK government’s building safety bill, Financial Times, 20^th July 2020.

[9] That provision was repealed in October 2005[9].

[10] See Explanatory Notes to draft Bill, para 668.

[11] A similar proposal in relation to service charge funds was set out in section 156 of the Commonhold and Leasehold Reform Act 2002. However, the new section 42A set out in the 2002 Act was never brought into force. It is a little curious that the government proposes to revive the idea for Building Safety Charges.

[12] See Daejan Investments Ltd v Benson [2013] UKSC 14; [2013] 1 W.L.R. 854.

[13] Notably Waaler v LB Hounslow [2017] EWCA Civ 45; [2017] 1 W.L.R. 2817.

[14] Residential service charge accounts Guidance on accounting and reporting in relation to service charge accounts for residential properties on which variable service charges are paid in accordance with a lease or tenancy agreement, ICAEW Technical Release, 2011. This guidance is currently under review.

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