Commons Select Committee hears just how little the government understands of the Building Safety Crisis and leasehold law

By Liam Spender

Yesterday the Housing, Communities and Local Government Select Committee heard from Lord Stephen Greenhalgh and Richard Goodman. The session was to gather evidence on the progress of cladding remediation. Lord Greenhalgh is Minister of State for Building Safety. Richard Goodman is Director-General of Building Safety, the civil servant in charge of the Building Safety Fund and the Building Safety Bill.

LKP published an article yesterday setting out what was said about the government’s proposed forced loans (https://www.leaseholdknowledge.com/select-committee-none-the-wiser-over-cladding-forced-loan-schemes/). In summary, yesterday’s evidence was that neither Lord Greenhalgh nor Mr. Goodman appeared to know much of any significance about the terms of the forced loans, how they would be attached to buildings or how they would affect leaseholders. Lord Greenhalgh did not deny that there had been no impact assessment performed by the government to date on the forced loans proposal. The Committee was promised details on the proposal “soon”.

This piece focusses on what we heard regarding other aspects of the Building Safety Crisis, with the key points being:

1. A lot of time was spent by Lord Greenhalgh and his official giving titbits of information about the new “risk-based approach” to remediating buildings. Suggestions were made that lower-rise buildings may not need to have cladding removed if alternative escape routes, better alarms or sprinklers would be effective cures.

2. The potential bright spot around a risk-based approach was rapidly overshadowed by the fact that neither Lord Greenhalgh nor his official could say how many 11-18 metre buildings were affected or would benefit from a risk-based approach. Lord Greenhalgh and Mr. Goodman disputed that ARMA’s estimated costs of remediation or capacity constraints on doing the work were accurate based on government data, which has not been disclosed.

3. The Developer Tax and Gateway 2 Levy announced by Robert Jenrick on 10 February will be set-off against the £3.5 billion extra announced for cladding removal on buildings taller than 18 metres.

4. Lord Greenhalgh mooted a levy on cladding manufacturers to “cast the net wider” beyond developers to raise more money for remediation.

5. Lord Greenhalgh said he was wary of going too far with a developer levy because he did not want to go so far as to “bankrupt” developers, because we need them to build all the homes required over the next few years. He went out of his way to praise recent accounting provisions announced by developers to pay for cladding costs. Those provisions come with all manner of strings attached and amount to less than 2% of the estimated £15 billion bill. As explained below, in one case most of the provision is paying to remediate defective concrete frames rather than cladding.

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Subject: Cladding Remediation – Follow-up Witness(es): Lord Greenhalgh, Minister of State for Building Safety and Communities, Ministry of Housing, Communities and Local Government; Richard Goodman, Director-General Building Safety, Grenfell & Net Zero, Ministry of Housing, Communities and Local Government Subject: Cladding Remediation – Follow-up Witness(es): Lord Greenhalgh, Minister of State for Building Safety and Communities, Ministry of Housing, Communities and Local Government; Richard Goodman, Director-General Building Safety, Grenfell & Net Zero, Ministry of Housing, Communities and Local Government

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6. The witnesses also repeated the government line about balancing taxpayer interests against leaseholder interests. This is a false distinction because the bill should be paid by developers, not taxpayers. Leaseholders are also taxpayers. Many have paid stamp duty for their properties.

7. Lord Greenhalgh defended clauses in the Funding Agreements issued by the Building Safety Fund which require funding for both cladding works and non-cladding works to be in place as necessary because leaseholders “elect” to do the non-cladding works.

8. Another roundtable with insurers was promised by Lord Greenhalgh to discuss rising costs of buildings insurance. The government seems to be at pains to avoid intervening in the market and appears not to be collecting any data on how insurance premiums have been affected by the Building Safety Crisis.

9. Also discussed were waking watch costs, as to which Lord Greenhalgh said that there were no proposals to change the guidance or to provide funding beyond the £30 million fund announced last December.

10. Social housing got a mention too. Lord Greenhalgh batted away any suggestion that forcing social housing providers to pay for cladding remediation would not affect service levels because the remediation would be a capital project. Of course, increasing capital expenditure requires more revenue spending to cover interests and repayments. If housing association income stays the same, this means that either capital will have to be redirected to remediation over new building or revenue spending will have to be cut to pay for additional borrowing to continue to support new building. Either way, there will be an effect on social housing supply and services.

Overall, it was a dispiriting session for any leaseholder to watch. There appeared to be welcome titbits on risk-based approaches and a mooted levy on cladding manufacturers, but overall the picture was gloomy. The usual platitudes were offered that leaseholders are not to blame for the crisis, including references to “shoddy workmanship” by developers. Lord Greenhalgh nevertheless repeated the worn and specious trope that leaseholders will have to pay some or all of the costs of rectifying cladding and non-cladding defects. This was said to be necessary to protect taxpayers’ interests and the commercial interests of large developers.

Developer Levies, Cladding Levies and Accounting Provisions

Developer Levies

On 10 February 2021, Robert Jenrick announced a £3.5 billion increase to the Building Safety Fund to remediate cladding on buildings taller than 18 metres. A scheme of forced loans is to be offered to remediate cladding on buildings between 11 and 18 metres. There is no taxpayer assistance for the costs of remediation non-cladding defects in buildings of any height, which ARMA has estimated average around £20,000 per leaseholder. There is no taxpayer support at all for buildings less than 11 metres tall.

Mr. Jenrick announced two new taxes on developers. The first was a tax on developers expected to raise £200 million over 10 years. The second was a “Gateway 2 levy”. Gateway 2 is the building control approval stage of “higher-risk buildings”, currently defined as buildings more than 18 metres tall or with more than 6 storeys, which is due to be introduced under the Building Safety Bill.

On 22 February, Housing Minister Christopher Pincher, in answer to a question from the Committee’s Chairman, Clive Betts, promised further details on the forced loans scheme and the two levies announced by Mr. Jenrick would be announced in the Budget on 3 March (https://hansard.parliament.uk/commons/2021-02-22/debates/C0E207A1-3D3D-434A-AAD3-5DF63CC7469F/CladdingRemoval).

Bob Blackman noted that this promise had not been kept. The Budget contained no details of either levies or loans.

Lord Greenhalgh said that the package of support being offered to leaseholders was “globally unprecedented”.

This appeared to be a reference to the amounts pledged here versus the amounts pledged in New South Wales and Victoria, Australia.

In each of those states the state governments have taken steps to limit remediation to a few hundred high-risk buildings. They have done so by auditing buildings against objective standards of risk. Both states have provided substantial taxpayer support for the remediation programmes. Both states have also reformed already pro-occupier laws to make it easier to claim against errant builders and to force up the standards of the construction industry. Little, if any, of the same is on offer from the British government. That inaction has turned the building safety issues here into a crisis of public policy unprecedented in our history.

Lord Greenhalgh defended the government’s paltry levy proposals on the basis that we need developers to build new homes to address a shortage of housing. Lord Greenhalgh’s argument would be that it would be counter-productive to impose a levy on developers so high that it would bankrupt them.

There is, of course, no evidence to support Lord Greenhalgh’s assertion that the proposed £200 million a year tax across the industry is the most it can afford. Nor is the government making any effort to determine if more could come from developers. This reflects the government’s political choice to put the commercial interests of developers ahead of the interests of leaseholders. A choice reinforced by the fact that part of the capital available for social housing will be diverted to cladding remediation, reducing the amount available for new building. This will worsen any housing shortage and thereby indirectly increase demand and, in turn, the prices private developers may charge.

Lord Greenhalgh confirmed that the £2 billion expected to be raised from a tax on developers will be set-off against the additional £3.5 billion of taxpayer support announced on 10 February.

The developer tax will, according to Mr. Goodman, be on developer profits rather than per new-build dwelling. The “Gateway 2” levy is to raise additional money on top of the £2 billion developer tax and is to be introduced as part of the Building Safety Bill. The question was not asked yesterday, but the Building Safety Bill as currently drafted envisages that some or all of the costs of the new Building Safety Regulator will be paid by fees charged for dealing with certain applications under that new legislation. It is unclear if the money raised from the Gateway 2 levy will go to running costs of the Building Safety Regulator or be available for cladding remediation.

Lord Greenhalgh’s second line defence justifying imposing costs on leaseholders was that taxpayers who did not own properties should not have to pay for leaseholders’ properties to be remediated. This is a false distinction. Leaseholders pay taxes, including Stamp Duty on their properties. To say they have no claim on public funds is asinine. People who have no children pay taxes for other people’s children to be educated. Is Lord Greenhalgh suggesting his logic is extended so that the childless get a tax rebate?

Assuming only £2 billion of the £15 billion estimated remediation cost is raised from the developer levy, then the proportions contributed by the taxpayer to solving problems caused by shoddy construction will be a net £3.1 billion (21%), the contribution from developer taxes will be £2 billion (13%), with the remaining £9.9 billion (66%) coming from leaseholders. The party with no responsibility is therefore paying two-thirds of the bill.

Accounting provisions by major developers

Lord Greenhalgh also praised the recent accounting provisions made by large developers such as Barratt (£82 million) and Persimmon (£75 million), said to be going toward cladding remediation. Lord Greenhalgh singled out Barratt as deserving particular praise because he said its contribution was in addition to the money it had put up for ACM cladding remediation. This showed that some developers were “doing the right thing”.

Lord Greenhalgh is mistaken. The £82 million Barratt has provisioned in its accounts to date includes all the money it put up for ACM cladding. As revealed by note 3.2 to Barratt’s 2020 Half-Year Results Announcement, the bulk of this money is actually going to remediate defective concrete frames at Citiscape and 26 other buildings (https://www.barrattdevelopments.co.uk/~/media/Files/B/Barratt-Developments/press-release/2021/half-year-results-2021.pdf). Barratt’s 2020 Annual Report put the cost of cladding remediation included within its provision at around £11.4 million (https://www.barrattdevelopments.co.uk/~/media/Files/B/Barratt-Developments/reports-presentation/2020/barratt-ar2020.pdf). The reasonable inference to be drawn from the accounts is that cladding appears to have been a useful smokescreen behind which to hide structurally defective buildings.

Other developers including Taylor Wimpey (£125 million) and Vistry Group (£20.9 million) have announced similar provisions in recent weeks.

However, the small print in all of these announcements indicates that there are strings attached to this money, usually related to whether the group still owns the freehold or whether it considers the works “proportionate”. As few as 10 buildings per developer may be covered by these accounting provisions. Many of the announcements refer to “contributions” rather than full payment. Taylor Wimpey’s announcement in particular states explicitly that it expects to continue to dump costs on the taxpayer where buildings are eligible for the Building Safety Fund.

The accounting provisions announced by major public housebuilders to date total just over £300 million, against an estimated cost of £15 billion, i.e. just 2% of the total estimated cost. All manner of strings are attached to these derisory sums. Praising developers for these accounting provisions is an insult to both leaseholders and taxpayers, who stand to hand over a total of around £30 billion in subsidies to these same builders by the time the Help To Buy Scheme ends.

The same announcements from these developers will continue to pay out hundreds of millions per year to their shareholders in the form of dividends and share buy-backs. The accounts of these companies show that they are well-capitalised, highly profitable businesses with shoulders broad enough to pay several hundred million a year each toward fixing the building safety problems they caused and without affecting housebuilding at all.

Mooted cladding levy

Lord Greenhalgh noted that cladding manufacturers and other building products suppliers had healthy margins. The evidence from the Grenfell Inquiry to date showed malfeasance on their part. Lord Greenhalgh mooted that a levy could be imposed on the manufacturers to broaden the tax base and get more money to lessen the burden on leaseholders. It is a good idea, but is the government going to prefer the commercial interests of such companies over the interests of leaseholders, as it is doing with developers?

Forced Loans

Lord Greenhalgh and Mr. Goodman offered little in the way of detail on forced loans, other than to say that a joint team of Treasury and MHCLG officials was working on the options for implementation. Mr. Goodman appeared to suggest that this would involve leaseholders having some sort of say in how the works covered by the loans would be performed. Lord Greenhalgh appeared to suggest that the forced loans would involve some sort of taxpayer subsidy. It was unclear if this meant as to the interest rate or whether the taxpayer would be meeting any costs above the £50/month paid by leaseholders.

Implementing such loans will be a nightmarishly complex project for the government.

The scheme will have to deliver a loan to a building repaid by leaseholders but without liability on the building owner to pay anything. Apparently leaseholders will get some say in how the loans are spent. This will require navigating a legal quagmire encompassing loans already secured on the freeholds of some buildings and leasehold law denying leaseholders the ability to challenge costs incurred under fixed service charges. That is before and the economic effects of such a scheme on house prices and affordability tests for mortgage and consumer credit finance. Ill-conceived tinkering with these legal principles will lead only to years of housing market repercussions and litigation.

As LKP trustee Dean Buckner pointed out in his evidence to the same Communities Select Committee on 1 March, loading up debt and non-cladding remediation bills on mortgaged flats is eventually going to have to be reflected in the book values of existing mortgages.

Housing crisis. Possible banking crisis. And lease forfeitures ‘very, very soon’, Communities Select Committee is warned

If banks do not have enough capital to cover the difference between the book value of loans and the real value of such loans once forced loans and non-cladding remediation bills are reflected in the price of flats, there may be another 2008-9 style banking crisis.

Mr. Goodman suggested that the £50/month loan scheme was welcomed by lenders as it would bring certainty to the costs associated with remediation. There is no such certainty from the proposed scheme. The bills for internal fire safety defects will have to be paid in full by leaseholders. These may amount to as much as £20,000 per flat. If the money for that work is not found then the cladding work will be done in vain, if at all.

Establishing the principle of loans to leaseholders also dovetails nicely into the proposed Building Safety Charge under the Building Safety Bill. When that legislation comes into force it is possible that new standards will be applied retrospectively to existing buildings of more than 6 storeys or more than 18 metres tall. This may lead to further remediation costs for leaseholders. Establishing the principle that such changes can be made retrospectively and the costs forced onto leaseholders by loans suits the government’s apparent policy intention that it can change the rules for high-rise buildings any time it likes and expect leaseholders to pay up.

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This advice to would-be councillors issued by the Local Government Association is an excellent background to the cladding crisis:

Supporting residents who have been affected by cladding issues

This Local Government Association (LGA) briefing is aimed at ward councillors supporting residents in their local areas. It explains the background to the cladding scandal, highlights issues facing residents, and sets out ways in which councillors might support them.

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Risk-based approach

Lord Greenhalgh and Mr. Goodman offered tantalising titbits regarding a new risk-based approach to remediation in buildings between 11-18 metres. Details were scant. Suggestions included restricting the need to remove cladding to buildings were alternative escape routes were available, where better fire alarms could be deployed or where sprinklers may help.

The solution sounds sensible, but little common sense will be employed by managing agents and freeholders with a vested interest in managing their own legal liability to the lowest possible level at leaseholders’ expense. The government will have to intervene to compel managing agents and freeholders to adopt a risk-based approach. They have proven they will exercise any discretion only in their own interests.

Insurance

Lord Greenhalgh was asked what the government proposed to do about insurance premium increases for buildings insurance. His answer was that he was reluctant to interfere in the market. The evidence for such increases appeared to be anecdotal, claimed Lord Greenhalgh. It appears the government is not collecting any data that would help prove the facts either way.

Lord Greenhalgh’s solution was another round-table with insurers at which the issues would again be discussed. Until the government challenges insurers on how premiums can be increasing in the absence of published fire loss claims data and risk models, the insurers will not change their tune. Or is the government going to continue to take at face value the insurers’ assertions that the risk of a building catching fire has changed so greatly in recent years to justify the increases in insurance premiums?

It is worth noting that contrary to the insurers’ protestations that their premiums reflect risk, the Royal Borough of Kensington and Chelsea – which suffered a £5 million loss as a result of Grenfell –saw its 2018-19 insurance premium increase by only 82% across all of its 2,600 odd leasehold properties (https://www.rbkc.gov.uk/sites/default/files/atoms/files/Decision%20of%20the%20First%20Tier%20Tribunal%20dated%2022%20June%202020.pdf). 42% of the 2018-19 premium increase was attributed to the insurer’s Grenfell fire loss.

Last week ARMA presented figures to the committee showing average premium increases of 400% per building in a sample of 350 buildings above 18 metres. These buildings appear not to have any fire loss claims history.

It is difficult to reconcile how a building with no fire loss claims can have insurance increased by 400% when a council with both a huge fire loss claim and years of underwriting losses on the policy has its premium increased by less than one-quarter of that amount. Even allowing for a withdrawal of insurers from the market, higher rebuild costs and higher reinsurance costs, the insurers have serious questions to answer.

An allied problem not covered by the committee yesterday is the hidden commission paid to managing agents and/or freeholders as part of these insurance policies. The costs of these commissions are passed on to leaseholders. The commissions are said to be justified because they cover the costs of managing insurance claims and placing insurance. It is absurd to suggest that the freeholder or managing agent has any material costs in placing insurance. That work is done by the broker, who receives a separate commission. It also makes no economic sense that the fixed costs for the staff handling insurance claims are paid from commissions which, by definition, vary up or down with the price of insurance. In practice, the costs of such staff are paid from the fixed base management fees charged per property by agents. Insurance claims at larger sites are also partly handled by on-site staff, the costs of which are already paid by leaseholders in full. The commission represents pure profit for managing agents. The fact that they are usually buried deep in the service charge accounts and shows that the people receiving them have something to hide.

Funding Agreements

There has been significant public controversy over the legal terms on which funding from the Building Safety Fund and ACM Remediation is being offered. Funding is offered under separate legal agreements for Pre-Tender Support and final grant funding for the actual works.

The Pre-Tender Funding Support Agreements for both funds previously contained a clause banning public comment on the progress of any works without the prior written permission of the MHCLG press office. This gagging clause was removed from that agreement after a public outcry, including questions in the Commons. The final form Funding Agreement still contains such a gagging clause.

Both Pre-Tender Support and Funding Agreements also contain clauses requiring the signatories to have funds available for all works covered by the project, whether or not the works are covered by the fund. The funds only cover works for cladding and things integrated into the cladding. As the government is well aware, other works to remedy what Lord Greenhalgh termed “shoddy workmanship” are frequently necessary to remedy internal fire safety defects, such as missing fire breaks and fire stopping.

Lord Greenhalgh said that the clauses requiring all funding to be in place were legitimate because otherwise the taxpayer would be left with a potential liability to pay for non-cladding costs. Lord Greenhalgh is mistaken. The taxpayer would not be liable unless a government body was a party to the non-cladding remediation contracts. The funding is structured so that the taxpayer is not a party to any of the agreements relating to the works. There can therefore be no liability on the taxpayer for such agreements.

Most alarming was the fact that Lord Greenhalgh still appears not to understand that leaseholders have no say and no control over how works are being done at most buildings. Even where leaseholders own the freehold or exercise a Right To Manage, they will find that non-cladding works are required because the government’s blunderbuss approach to cladding remediation has revealed other internal fire safety defects. The internal defects, as Lord Greenhalgh accepted, being exclusively the fault of developers but the costs being visited almost exclusively on leaseholders.

Lord Greenhalgh appears not to understand that most leasehold buildings are run by managing agents appointed by freeholders. The agent is free to design a solution that results in maximum project management fees for itself whist simultaneously limiting any potential legal liability for itself and its freeholder client, safe in the knowledge that leases allow these costs to be passed on to leaseholders.

Stephen Timms has already mentioned in Parliament how some managing agents are abusing this charmed position (https://hansard.parliament.uk/Commons/2021-02-24/debates/B4494BB1-F6D0-4BE1-A1BA-26761AE51C8D/details#contribution-385B62BB-C4D1-44A3-8226-C3BCD27DA1D5).

Leaseholders are effectively being turned into indemnity funds to cover the legal risks of freeholders, managing agents and the cottage industry of allied professionals advising on cladding and other works. It is shocking that the minister responsible for imposing this solution on leaseholders is apparently ignorant of basic facts about leasehold.

This situation will not change until there are radical reforms to both leasehold law, the Limitation Act and certain contract and tort law principles making it easier to bring legal claims against the developers. Such legal mechanisms have long existed in Australia and could easily be implemented here, if only the government chose to do so.

It was not covered by the committee yesterday, but the government’s failure to prioritise grants from the Building Safety Fund by risk means that some buildings will get money by virtue of being first in the queue rather than being most at risk. It cannot be a good use of £3 billion of public money to hand it out to buildings without demonstrating that they have a real need for remediation.

Whipping up a storm over cladding without actually matching the solution to the risk posed by any given building means that billions of both taxpayer money and leaseholder money will most likely be wasted on remediating buildings at low or no risk of façade fire. Cheaper solutions may be possible.

Conclusion

Lord Greenhalgh’s evidence to the committee was unsatisfactory. He betrayed a lack of a detailed understanding about many of the key measures proposed by the government. His ignorance about the leasehold system and how the government’s ill-advised intervention has exacerbated the problems that system causes leaseholders on a daily basis was palpable. We can and should expect far better from our public servants.

The government has botched the response to the building safety crisis in two ways. First, its knee-jerk reaction to Grenfell has led it to impose a costly and ill-advised solution on buildings at ruinous expense to leaseholders. Secondly, the government has made a political choice to protect the commercial interests of private housebuilders and their shareholders over leaseholders. This short-sighted approach ignores the gathering storm over the housing market. It is only a matter of time before more money will be required.

It would be a far better use of the public money announced to date to pause the implementation of the current “rip and replace” solution for cladding in all buildings except those with imminent fire risk. The existing public funds could then be redirected to compensating leaseholders who have already paid for remediation, waking watch and higher insurance costs. A comprehensive audit should be undertaken to identify every affected building, of any height, and to prioritise them for remediation according to risk. ARMA has proposed part of this scheme, in the form of a survey of a few hundred buildings to determine the true extent of external and internal fire safety defects and to plan accordingly.

Once the buildings are identified and prioritised for remediation, all of the public money spent to date should be recouped from a levy on the building and building products industry for as long as it takes. That way the polluter will pay. The industry may then learn a valuable lesson that would stop this happening again in the future: if you break it, you own it.