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Limitations on Recovery of Remediation Costs Through the Service Charge: Schedule 8
4th July 2023
Daniel Dovar looks at the limitations on recovery of remediation costs under schedule 8 under the BSA.
The BSA (Building Safety Act) both compels landlords to remediate through implied lease terms (new s.30C, Landlord and Tenant Act 1985) and remediation orders (s.123, BSA). It also deals with who bears the cost of such works: through implied terms (new s.30D, 1985 Act); Remediation Contribution Orders (s.124); and through limitations on service charges under Schedule 8.
Schedule 8 sets out circumstances in which limits are imposed on the ability to recover the cost of remediation work through the service charge from the residential leaseholders. It provides a number of different scenarios where cost recovery is either outright prohibited or limited. In broad terms these divide the focus onto: a.) landlord; b.) tenant and c.) works. There is also a cap placed on the amount that can be charged in any one year.
In outline they are where:
(1) The Landlord has responsibility for the defect in the first place
(2) The Landlord and associated companies have a net worth in excess of a certain sum;
(3) An individual leasehold interest is of low value;
(4) They relate to specific types of defect.
Part 5 of the Act contains definitions which apply to Schedule 8, and this Schedule starts with a paragraph dedicated to definitions, with references back to other parts of the Act for definitions, and new ones.
The process of Landlord and Qualifying Lease Certification is labyrinthine and is deserving of an article in its own right, but for now, it is important to note that it is highly material to the operation of Schedule 8.
Apart from paragraph 2, most of the Schedule applies only to Qualifying Leases. They are defined as:
(1) the most inferior lease of 21 years or more, liable to pay a service charge, granted prior to 14th February 2022,
(2) being the only or principal home of the leaseholder, who does not own more than two other dwellings in the UK.
If the obligation for a landlord to provide certification is not complied with, that will preclude them from claiming any service charge under any lease for the costs of a Relevant Defect; it also gives rise to a presumption that the Contribution Condition is met.
No service charge payable
Paragraph 2: Responsibility: Landlord focus
This applies where the landlord (or associated person) is responsible for the Relevant Defect. This is a wide paragraph, and unlike the others, it is not limited to Qualifying Leases, it applies to a lease of any premises in a Relevant Building. It is absolute in its limitation: no service charge is payable for a Relevant Measure.
Two further definitions are provided for:
(1) Responsible: i.e., if the landlord was the developer or was in a joint venture with the developer or they commissioned the works;
(2) Relevant Landlord: a landlord under the lease at the Qualifying Time [14th February 2022] or any superior landlord at that time.
Paragraph 3: Contribution Condition: Landlord focus
This paragraph measures the depth of the landlord’s pocket and only applies to a Qualifying Lease. There is a presumption that this condition is met unless the landlord provides a certificate proving otherwise (paragraph 14).
No service charge is payable for a Relevant Measure relating to a Relevant Defect if the Landlord Group at the Qualifying Time has a net worth in excess of N x £2mn. N is the number of relevant buildings that the Landlord Group was a landlord of at the qualifying time.
There are two further definitions:
(1) Landlord Group – the relevant landlord and any person associated;
(2) Net worth – valued as per regulations made by Sec of State.
Paragraph 4: Low-value leases: Tenant focus
No service charge for the cost of a Relevant Measure relating to a Relevant Defect if the value of the Qualifying Lease is at the Qualifying Time in Greater London: <£325,000, or <£175,000 elsewhere.
Paragraph 8: Removal or replacement of any part of a cladding system: Work focus
No service charge is payable under a Qualifying Lease for cladding remediation, being the removal or replacement of a cladding system that both forms the outer wall of an external wall system and is unsafe.
This will require an analysis of both the make-up of the cladding system, whether it forms the outer wall and whether it is unsafe. As to the meaning of ‘unsafe,’ that will tie in with the various assessments of risk undertaken (i.e., under Parts IV and V and the building safety risk).
Paragraph 9: Legal or Professional Service: Work focus
No service charge under a Qualifying Lease for legal or professional costs incurred relating to liability as a result of a Relevant Defect.
Limitation on amount payable
Paragraphs 5 to 7: Other limitations: Tenant focus
There is a Permitted Maximum for a service charge under a Qualifying Lease for the cost of a Relevant Measure relating to a Relevant Defect. This is both backward and forward looking as to what service charges are caught. It starts ‘5 years before’ the provision comes into force. The amount will vary according to the value of the lease, it is then subject to a further reduction in that under paragraph 7, only 1/10th of that maximum can be charged in any one year.
The Permitted Maximum is in Greater London £15,000, elsewhere £10,000, save where the value is above £1mn, where the cap increases.
The value is to be measured in accordance with regulations made by Sec of State (para 6).
Paragraph 10 prohibits sums being taken from the reserves or being levied where no service charge is payable.
Paragraph 11 prevents a landlord topping up any under recovery from a leaseholder who does not qualify for a reduction.
Paragraph 16 precludes a landlord from charging the costs to the leaseholders where prescribed information or documentation is not handed over to the leaseholders.
Paragraph 18 voids any attempt to avoid the Schedule.
Recourse to other landlords
Where a landlord is prohibited from recovering all or part of their costs from leaseholders by reason of Schedule 8, they may have recourse to other landlords for a contribution to those costs under the Building Safety (Leaseholder Protections) (Information etc.) (England) Regulations 2022/859, regs 3 to 5.
Schedule 8 provides cascading scenarios for when limitations on the recovery of remediation costs will bite. It is rife with defined terms and contains some ambiguities in application. This short article can only give an introduction to its full application, which will require more detailed consideration.
This article first appeared in Property Law UK in July 2023.