An air of unreality

Whilst winding my way home this evening, I chanced across a piece from Inside Housing in which is was reported that the Secretary of State, (Sajid Javid) had suggested that private freeholders should pick up the costs associated with fire-safety works and not recharge them to leaseholders. More remarkably, he is reported as saying that the private sector should follow the lead of the public sector in this regard (story here).

This is, frankly, pie in the sky thinking:

(a) Why on earth would a private landlord want to subsidise the leaseholders in this way? What planet does he live on? These costs are going to run into hundreds of thousands of pounds (if not more). I’m presently advising on one case where the costs are £11K per week just on fire safety measures, with a further £1m or so needed in the next few months in order to replace the cladding. It is just unrealistic to think that a private developer will pick up those costs (not to mention that, in many cases, the present freeholder will not have been responsible for commissioning the now flawed work, thus making it even less likely they’d want to pick up the costs).

(b) In any event, many private landlords will not be able to do so. Imagine that you have a lessee-owned freehold vehicle (e.g. a nominee purchaser post-enfranchisement). Where do you think it would raise the money from to do this? The capital value of the building is mostly (if not totally) in the long leases. Likewise where the “landlord” is actually an RMC or RTM Company (which are “landlords” for the purposes of service charge recovery, even though they own no estate in land).

(c) Even if you have a true private landlord (whether an Earl Cadogan-esque figure, or a private developer, or a ground rent fund), the reason for holding a freehold reversion is to generate an income stream, not to pay tens upon tens of thousands of pounds for a service where the benefit is, on any view, at least shared with the leaseholders.

(d) And it’s just not true to say that social landlords are absorbing these costs. They will, I accept, where there are secure/assured tenants in a block, but that isn’t because of any high minded approach, but because of s.11 LTA 1985 and the relative paucity of service charge provisions in such tenancies. Where there are RTB/RTA, shared ownership (sic) or just commercial leasehold sales, there will be attempts to recover (as the IH piece makes clear). That is because social landlords have fiduciary duties to seek to recover these costs (and, at this stage, can I just waive at our DCLG readers – if you don’t believe me, go and read the annotations to s.219, Housing Act 1996 in the Encyclopedia of Housing Law as that’ll explain why they have to recover these costs; and before you get ahead of yourselves, no, the existing Directions under ss.219, 220 are unlikely to help).

The costs to leaseholders of fire safety works post-Grenfell are going to be enormous and, likely, unaffordable in many cases. There is a real problem developing here and the Secretary of State needs to give this much more serious and thoughtful attention than it seems he has done so far.

 

 

 

About J

J is a barrister in London. He loves service charges and all things leasehold law related. He also likes beating rogue landlords and mortgage companies.

Posted in Housing law - All, Leasehold and shared ownership.

11 Comments

  1. Too true! You also have shared freeholds, jointly owned by the leaseholders, and particularly where there’s only a small number of flats, there often isn’t much money for maintenance. These joint freeholders/leaseholders are often on average and even low incomes.

    I own a flat where there’s a joint freehold, and have had to pay literally thousands out of my own pocket for maintenance over the last few years, including over £2k this year to fit an interlinked fire alarm system that serves 3 of the 4 flats.

  2. J asks why private landlords should pay for works which go beyond repair. It is just as valid to ask why tenants should pay, but at the end of the day this is not an issue of what is reasonable or morally justifiable: it is a legal issue dependent on the terms of the relevant leases. In most cases the landlord will be entitled via the service to recover only the cost of repair – and not be liable himself to do more than repair. Stalemate. See my blog post at http://www.raymondcooper.co.uk/business-leases/treatment-inherent-defects-leases-updated-2017/.

    • It will be a rare residential lease (even RTB lease) that is restricted to repair only. Renew or maintain would arguably cover the cladding costs.

    • Really? In these cases there is no disrepair, so replacing the cladding is not repair – and in this context I don’t think `maintain` adds much. This is covered in detail in the blog post I referred to. In order to enable the landlord to recover the cost of replacement cladding the service charge would need to cover improvements or rebuilding – not sure what leases you’ve been looking at but no properly advised tenant would accept that and it’s not in any of the precedents referred to in the blog.

    • ‘Repair, maintain and renew’ is pretty standard in residential leases. Your commercial lease precedent wordings simply aren’t relevant to residential leases – renew is not usually restricted to repair issues.

      As you accept in your post, ‘renew’ covers such issues. I’d say ‘maintain’ does too, certainly to the costs of removal and probably replacement. The condition of the building is dangerous and now found not to meet required standards. I’d agree that maintain would not add more in the absence of a discovered risk.

      Obviously people are going to have to look closely at their leases, and there will be disputes, but I suspect the number restricted to ‘repair’ only will be very limited. And, as J. says, there will often be other relevant clauses.

      It is also not the case, at least in residential leases, that the landlord cannot do works beyond those mentioned in the lease. They won’t be able to recover the costs, but the lease obligation is simply the enforceable obligation to the lessee. As long as there is no interference with the lessee’s demise or easements, the landlord certainly could remedy the cladding. It is not stalemate. Of course, the prospects of a landlord doing this work with no chance of recovering the costs may be slim…

    • That’s also not how it’ll happen. The council/fire brigage will serve/threaten to serve enforcement notices and the landlord will rely on a “comply with the directions of a competent authority” clause.

  3. I’m not sure about that. Leases of part are usually an internal demise and any covenant to comply with statutory requirements would apply to the demised premises only. What you’d need is a covenant by the landlord to comply with statutory requirements in relation to the retained parts of the building and the cost incurred to be specifically recoverable via the service charge – this could be there but it would need to be very clear to avoid a dispute equivalent to stalemate.

  4. I’m not sure I agree with Giles Peaker’s last comment. The Leasehold Advisory Service (LEASE) say in their guidance at https://www.lease-advice.org/advice-guide/service-charges-other-issues/:
    “works of improvement: as a general rule, leases in the private sector do not oblige leaseholders to contribute to costs of works of improvement to the building. However, leases from local authorities and housing associations often do contain such provision”. I agree that my blog post was largely concerned with commercial leases but are the principles so different? Maybe length of term? I can’t access other precedents just now but I would never advise a tenant to agree to agree to wording that could extend to rebuilding (whether commercial or residential). I’ll try and find other precedents later but whatever the wording there will be a battle.

    • LEASE are somewhat confused. Council RTB leases, mostly though not uniformly, do not include ‘improvements’. Some private leases do. But this is not about ‘improvements’. Look again at your own post, the quote from Hill & Redman at [3269].

      ‘Repair’ can be distinguished from ‘renewal’. ‘Repair’ will involve some work of renewal or replacement: it is restoration by renewal or replacement of subsidiary parts of a whole. ‘Renewal’, as distinguished from repair, is reconstruction of the entirety, meaning not necessarily the whole but substantially the whole of the subject matter under discussion.

      Renewal will do it. Renewal is common. Often ‘at the landlord’s reasonable discretion’, but still at tenant’s expense.

      The point about commercial leases is that the precedent clauses you quote are not used in residential leases, not least because it is not about tenant repairing obligation. So the form of wording restricting to repair is not broadly relevant.

      By the way, had a local authority lease today with the usual ‘repair to structure of building’ but then added ‘and remedy any defect to the building’. That would arguably cover cladding replacement too.

  5. Renewal might mean reconstruction of the entirety, as distinct from subsidiary parts, but I wasn’t sure whether the subject matter of the covenant had to be in disrepair for the covenant to be engaged. I will have a look at Woodfall.

    I have seen widely drawn covenants which allow for the recovery of the cost of “protecting, preserving, rebuilding” etc Those I am sure would be sufficient.

    “Compliance with stature” clauses are fairly common. Most of the case law there is on those types of clause, can be found in Dowding & Reynolds, Ch.17.

    You have to be slightly careful. There is a real risk that “statute” would not be construed the guidance notes (some statutory compliance clauses are drafted broadly to expressly include references to guidance notes – see, eg the stat compliance clause is BHP v Chesterfield; others are drafted in more restrictive terms) which suggest that a waking watch is necessary to comply with the 2005 Order, although it is difficult to imagine any FTT being brave enough to say that those notes were wrong, without some compelling expert evidence.

    You also have the prospect of lessees running an equitable set off or Sheffield v Oliver type double recovery argument where the landlord constructed the development, and may have a claim against the contractor, e.g. under the JCT contract, for breaching Building Regs, among other things.

    Then you have s20 to consider. Does a given arrangement with an agency to employ a waking watch amount to a QLTA? I understand that Corvan v Abdel-Mahmoud is going to the CA so we may hear more about contracts with no fixed terms.

    And where a landlord might employ a waking watch directly, there is Ingram v Church Commissioners for England to consider.

    And these costs are extraordinary!

    Thorny is an understatement!

    • A renewal covenant doesn’t have to have disrepair to be engaged. A common form in residential leases (and standard in shared ownership leases) is ‘renew when merited in landlord’s opinion’.

      Yes, the set-off arguments will be interesting. The trouble being that this cladding was ‘approved’ as meeting requirements, so not a simple breach of building regs against developer/contractor. They will have reasonably relied on manufacturer’s statements, who in turn will point to the fire safety lab and so on…

      I’d imagine dispensation from s.20 would be fairly easy to obtain for a waking watch in the circumstances.

      Thorny it certainly is!

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