Self-interested freeholders and property managers chorus: ‘taxpayer must pay over cladding’ … which, as it happens, leaves their income streams untouched

But insurers question whether future homebuyers should be paying

By Harry Scoffin

The representatives of anonymous and often offshore freeholders are being remarkably generous with taxpayers’ cash: saying they should pay up for cladding.

And the Association of Residential Managing Agents, representing the big managing agents that get their business from these freeholders, is – remarkably enough – in full agreement.

The happy result of this will be that after £4-5 billion of public money has been splurged on cladding remediation, “building owners” and their helpers will be looking at a sector that has had a massive public bailout and is completely unreformed.

The payola gets better as taxpayers generously remediate blocks where freeholders can then add two more storeys without the tiresome business of getting planners to approve:

MPs fail to stop Robert Jenrick’s multi-billion pound planning hand-out to offshore freeholders

Triple pina coladas in the British Virgin Islands etc all round.

Freeholders like to assure all and sundry – that is, MPs and ministers via their lobbyists – that they are the “long-term custodians” of blocks of flats … but that conveniently also means never, ever putting their hands in their pocket to maintain or repair them.

These points of view had another airing at the Communities Select Committee on September 28 over the Building Safety Bill and cladding.

Richard Silva, chief executive of £1.8bn freehold fund manager Long Harbour, confirmed that “definitely, unambiguously, the leaseholders should not pay. They did not built these things and they did not sign them off,” adding that freeholders were similarly innocent.

Recognising that for many sites the development company has gone bust or otherwise been wound up – a common property sector dodge – and with warranties expired, “someone has to pay and someone needs to pay now” which, he claimed, the “clever minds” at the ministry of housing could resolve through a “creative” package of support that recovers the bulk of the taxpayer money in an equitable manner over time.

“It does not have to be one entity or one cohort of society that pays for this. For 10 years, there could be a levy on certain types of certification when a planning application is granted to subsidise the up-front cost,” explained Mr Silva.

With yet more money set to flow from leaseholders to unregulated block owners in the form of a separate building safety charge, Mr Silva appeared to suggest that freehold investors work on a not-for-profit basis and are pointless intermediaries after all.

Trying to counter the growing consensus among policymakers that residential freehold investment is an asset class almost unique to England and Wales, where third parties have a superior legal title to the homes of flat owners, he said:

“Let’s not forget, building safety charges or service charges even are not profit centres. They’re basically there, designed ideally to match to the penny the costs of running a block. The managing agent will levy a fee for its services on top of that but, ultimately, the gas bill is the gas bill. The lift maintenance bill is the lift maintenance bill and, ideally, there is a balancing item at the end of the year.”

Only last week the Law Commissioner for property, family and trust law Professor Nick Hopkins used a speech to call for the phasing out of leasehold.

He argued the tenure was never created to deliver ownership nor management of a block of flats, has its roots in feudalism where a tiny elite had a total monopoly on land, and is characterised by conflict and inequality between “deep-pocketed and sophisticated freeholders managing a portfolio of investments” and the mere mortals whose only experience of the highly complex system is through their home.     

In another rejection of the freeholders as noble custodians narrative, the Competition and Markets Authority concluded in February that leaseholders of flats are “captive consumers with very little influence over the costs incurred by landlords or their managing agents that will in due course be passed on to them”.

MPs last week also heard from the Long Harbour representative that insurers, totally unrelated to fire safety considerations, were exiting the market in apartment buildings because there was no money to be made.

Citing lots of low-value claims and the cost and time spent handling them, Mr Silva omitted from the discussion the excessive levels of commission that some freeholders gorge on, but which harm consumers and require a sector-wide crackdown to make covering blocks of flats more viable for insurers.

Nigel Glen, the chief executive of the Association of Residential Managing Agents, is also a supporter of immediate government action, although he does think it should try to get some of the cash back.

He suggested that it was likely that the taxpayer would end up paying to fix defective blocks and criticised the Building Safety Bill for failing to protect leaseholders from the costs of historical safety defects. “If anything the Bill actually does the opposite”, he noted, as “anything can be put on the leaseholders and they have to pay within 28 days”.

“We need the funding now. My view on this would be that we have to get people safe, first and foremost. I am afraid that is where I think government step in. I am a taxpayer myself, but that is one of those things. The government should then try and recoup those costs from maybe, as we have mentioned, the developers, the installers, the cladding companies themselves and the manufacturers, but I do not think it should be the leaseholders,” he said.

While it would make sense for government to pursue developers and contractors through the courts after paying out to make flats safe in the immediate term, it may not be very successful in recouping the money.

As with the Building Safety Bill, which effectively changes the rules to ensure developers are not liable for bringing up to standard shoddy builds in the existing stock, the government is likely to have received legal advice suggesting developers would have a good case to counter-sue, citing faulty building regulations.

But another view came from insurers.

James Dalton, director of general insurance policy at the Association of British Insurers, said that he could not countenance shunting the cost of “historical liabilities” of dangerously-clad apartment buildings onto the next generation of homebuyers by way of Mr Silva’s proposed levy on new developments.

However, he welcomed that ministers and officials are finally conceding the need for state-backed “long-term schemes” to stagger the multibillion pound costs of fixing dangerous tower blocks.

Mr Dalton said his recent meetings with the government have indicated that preparations are underway for a major change of approach towards the post-Grenfell cladding crisis.

Repeating simply “I am not going to pay” was now being seen in Whitehall as unsustainable since it would lead to the taxpayer picking up the tab of cladding remediation works in the private sector anyway. “When you have that scenario, it is ultimately going to have to be the taxpayer who pays. The question is how much, when and over what time horizon,” he added.

But the ABI wants to be part of the “detailed technical conversations” surrounding the “very complex cross-subsidisation questions” underpinning any new policy package.

Earlier in the select committee meeting, LKP chair Martin Boyd urged the government to draw a line under “three years working in silos” by arranging a roundtable with all stakeholders in order to avert five more years of disarray.

LKP is also asking for an important but otherwise obscure clause of the Building Act 1984 to be brought into force, which the government has proposed to scrap in the Building Safety Bill without any explanation.

If supplemented by a change in the law to end the use of special purpose vehicles by developers to drop their liabilities, Section 38 of the 1984 Act would give a civil right to leaseholders of flats directly to sue developers and contractors for defective blocks.

It cannot be right that a purchaser of a decent washing machine will have a free 10-year guarantee, but has no equivalent for the most expensive purchase of their life.

A bit more on the BS Bill hearings …

Dame Judith Hackitt’s uninterest in leasehold tenure is like ‘wanting to build cars with no idea how they are driven’, says LKP

Sector says ‘no, thanks’ to controversial Building Safety Bill