130 apartment complexes in England have failed cladding testing since the Grenfell Tower fire in June 2017. The associated costs with the remediation work are expected to be significant, but who is responsible for paying for these works?
In the House of Commons briefing paper published in November 2018, the Government announced it would meet the reasonable cost of the removal and replacement of unsafe cladding by councils and housing associations, which is estimated to be at £400 million. The Government stated that in the private sector they believe the ‘morally right’ thing for Landlords to do is to not pass the cost of remedial works onto their tenants. Nevertheless, some private landlords may not be able to fund the works, particularly where the capital value of the building is primarily held in the long leases, making a lenders security in the freehold minimal. Lenders may, as a result, be unwilling to lend to a Landlord for improvements having no positive effect on the security value.
The reality of responsibility
A case which was referred to the First-Tier Tribunal (Property Chamber) saw estimated costs of removing and replacing the cladding on a block of flats in Croydon to be between £1.8 and £2 million, which could result in the leaseholders facing an average bill of £21,000, depending on the size of their flat. On 13 March 2018, the Tribunal ruled that the cost was recoverable from the leaseholders. Fortunately for them, the original developers, Barratt Development, stepped in and told the leaseholders that they would cover the costs of the remedial work.
Even if the lease doesn’t expressly pass on fire safety costs to leaseholders, the freeholder might still be able to argue those costs fall on them, through ‘sweeping-up’ clauses. These clauses allow freeholders to make leaseholders responsible for paying for a range of unexpected costs, for example, money spent for the ‘benefit of the building’ or for ‘good estate management’ or to comply with all laws, statute and regulations in relation to the property.
In another case referred to the First-Tier Tribunal, leaseholders were asked to meet the cost of ‘Waking Watch’ fire marshals in an apartment block in Salford; the Tribunal decided in January 2018 that the cost of providing fire marshals, totalling at nearly £18,000 for the period of 21 July to 7 August in 2017 alone, was recoverable from the lessees pursuant to the service charge provisions of the Lease.
The Landlord (freeholder) in this case received a letter from the local authority that any changes required, based on the findings identified in their fire risk assessment, must be undertaken under the Fire Safety Order 2005. The service charge provisions in the lease permit the recovery of costs of taking such actions as the Lessor shall think reasonably necessary in respect of any notice or order served under any statute, order or regulation. The Tribunal determined that on this basis, the cost of providing fire marshals was recoverable from the lessee under the service charge provisions.
It has been reported that the NHBC (National House Building Council) have accepted an insurance claim brought by New Capital Quay in Greenwich, after they concluded that there was failure to comply with building regulations at the time of construction. The NHBC will make a payment equal to the cost of the remedial scheme to make the building compliant. The CEO of NHBC confirmed that claims had been accepted on a number of developments following an investigation. NHBC provide new home warranty cover against construction defects, and so, recovery from them will not be viable in every case.
As a result of the Grenfell Tower fire, a ban on inflammable cladding is due to be implemented by the Government later this year, but this will not apply retrospectively. Nevertheless, there will still be a need or want to replace the unsafe cladding in the existing flats, and the allocation of responsibility for paying for this replacement will come down to the drafting of the Lease.
Both freeholders and leaseholders will need to have their leases reviewed to determine their responsibility. Our commercial property team can review your current lease agreements and answer any landlord or tenant queries you may have.