By Liam Spender
Liam Spender is a Trustee of the Leasehold Knowledge Partnership. Personally affected by the cladding scandal, Liam is a Solicitor-Advocate and Senior Associate at Velitor Law practising commercial litigation and arbitration in the City of London. Views in this article are personal and do not constitute legal advice. Liam is unable to take individual cases or to give legal advice to individuals.
The government’s long-awaited answer to the question of “who pays” for the costs of remediating cladding arrived earlier today.
The answer arrives in the form of a series of complex amendments to the Building Safety Bill. The amendments span more than two dozen pages of legal text. The Building Safety Bill is currently being scrutinised by the House of Lords. It is expected to become law later this Spring.
Some of the amendments require further legislation, in the form of regulations made by statutory instrument, so we cannot see all the detail in full today.
As with any legislation, whether the amendments deliver the solution intended by the government depends on how they work in practice. As explored in further detail below, there are some legal and technical issues that stand in the way of the amendments working in practice. Those issues will need to be addressed as the Building Safety Bill proceeds through Parliament.
In summary, and based on the detail available today, the amendments seek to achieve the following:
1. The government’s objective – although not spelled out in terms in the announcement or amendments today – is to create a statutory waterfall. This is hidden in the detail of the amendments.
2. The waterfall is intended to work as follows:
a. Developers and cladding manufacturers are expected to pay first.
b. Freeholders are expected to pay second, subject to an affordability test to be set out in the future.
c. Leaseholders are only expected to pay a capped amount towards non-cladding costs only. This contribution can only be collected where the landlord is not – and has never been – a company associated with the original developer.
d. Each layer of the waterfall will have to put in place its funding before the next layer can be triggered.
3. The aim of this waterfall arrangement is to ensure that any contributions from leaseholders become, legally, the last resort. For the past several years, as we all know, leaseholders have been the first resort, as a result of the way that lease terms have been drafted.
4. Crucially, this new waterfall addresses the conflict of interest inherent in the leasehold system. At present, landlords can spend leaseholders’ money without any effective control. The fact that freeholders are on the hook to pay concentrates their minds on the question of cost-benefit analysis. Are the works that they have deemed necessary when they did not have to pay still necessary when they do have to pay?
5. The government assured leaseholder groups at a meeting earlier today that it will continue to consult on the amendments as they proceed through the Lords.
6. No-one living in a building more than 11 metres tall (or with 5 storeys or more) will have to pay anything for remediating flammable cladding.
7. No-one living in a building more than 11 metres tall (or with 5 storeys or more) will have to pay more than £10,000 (£15,000 in London) to remediate non-cladding defects.
8. No-one living in a building where the freeholder or head lessor is an associated company of the developer will have to pay anything, for cladding or non-cladding costs.
9. There is a higher limit of up to £50,000 for properties worth between £1 million and £2 million, wherever situated. A still higher limit of £100,000 applies for properties worth more than £2 million, again wherever situated.
10. The caps set out above can be spread over five years, in equal instalments. For someone living outside of London in a property valued at less than £1 million, that would mean contributions of £2,000 a year for 5 years.
11. The caps set out above are one-off and one-time only contributions. Once they are exhausted, the landlord cannot come back for further contributions. However, there is a strict residence-based test for assistance with cladding costs. The amendments as drafted at the moment say only leaseholders living in an affected leasehold property as at the start of 14 February 2022 benefit from the protection. This is discussed in further detail below.
12. It is understood that each of the limits being set today will be applied based on some sort of formula to be spelled out in regulations. This formula will assign a value to each property, apparently without the need for an independent valuation.
13. Remediation and waking watch costs paid by leaseholders in the period of five years before these new provisions are commenced (so roughly back to June or July 2017) will count against the limits set out above. That means if you live in a building that requires further work and you have already paid to the limit of your contribution cap, then you will not have to pay anything further.
14. Shared ownership leaseholders will have their contribution to the cost caps scaled in proportion to their share of the property. For example, a leaseholder with a 50% share of a property worth less than £1 million in London would only have to pay £7,500 toward non-cladding costs. This may be spread over 5 years, so £1,500 per year.
15. Non-cladding costs above the level of any cap are to be met in full by social housing landlords where they are the landlord (or developer) of the building.
16. Buy-to-let landlords with one rental property are covered, in addition to their principal home, if that is within an affected building. Buy-to-let landlords with more than one rental property are not covered. As discussed below, it is not clear if this protection applies regardless of the number of properties, or if it is limited strictly to only one buy-to-let property.
17. The government’s intention is that anyone who completes on the purchase of an affected property after today will benefit from any assistance. There is a drafting issue with the protection from cladding costs. It is not clear from the wording of the amendments if that protection can be passed on to subsequent buyers. The caps on non-cladding costs do appear to be capable of being inherited by buyers, even if they did not own or live in the property as at the start of 14 February 2022.
18. The amendments create a series of new statutory powers – explained in further detail below – enabling action to be taken against developers, cladding manufacturers and companies associated with them to force them to pay toward non-cladding costs.
19. New legal powers are also being introduced to trace the assets of already liquidated companies into the hands of associated parties. This includes so-called “phoenix” companies that have been started up with the same assets and managers as previously wound-up companies.
20. For the first time, the government is also linking future building control and planning consent to past behaviour. Companies that do not agree to remediate their buildings cannot become members of a new Building Industry Scheme. Companies that are not members of a Building Industry Scheme cannot obtain planning permission or building control permission.
21. In addition, the amendments contain legal powers to compel certain types of freeholders / landlords not associated with the original developer to cover the costs of works.
22. The amendments also set out legal mechanisms to extract funds from responsible landlords who try to avoid their obligations by entering liquidation. As explained below, there are legal issues with the precise form of drafting currently laid down.
23. Resident-owned buildings are excluded from the protection outlined above. That is because leaseholders in those buildings are also the owners of the building. It is up to the residents to sort out their own claims against those responsible. Where there is no-one to claim against, this may mean those residents have to finance all the non-cladding remediation costs themselves. As explained below, there are currently legal issues with the drafting of these provisions.
24. The government’s negotiations with developers and cladding manufacturers continue. The government expects that they will reach an agreement to obtain some financial contributions from those developers and cladding manufacturers. This will be on the basis that those developers pay to remediate all types of defect in every building they have constructed over the past 30 years.
25. Today’s announcement that the government will create new legal powers to go after them will increase the commercial pressure on developers and cladding manufacturers to reach a negotiated solution.
26. The government is also expanding the higher-risk buildings levy to include non-higher-risk residential and mixed residential-commercial developments. This potentially drags in many more developers into the tax net.
27. Leaseholders in buildings under 11 metres tall, or with fewer than 5 storeys, get no assistance for cladding or non-cladding remedial works. The government’s view is that such buildings are not of sufficient risk to justify remediation. That will be a bitter disappointment where leaseholders in those buildings face costs.
The above is a simplified, short-notice summary of a series of complicated and interlocking legal provisions. It is likely the precise wording of these provisions will change as the Building Safety Bill continues its passage through the House of Lords.
You can read the amendments tabled today here: https://bills.parliament.uk/publications/45252/documents/1415
The government’s announcement is here: https://www.gov.uk/government/news/government-to-protect-leaseholders-with-new-laws-to-make-industry-pay-for-building-safety
The rest of this piece looks at the detail of today’s announcements.
What further details do we need to see?
There are several details that require further work to ensure that the amendments have the best chance of working in practice, as follows:
1. How does this affect buildings already undergoing remediation, whether as part of the BSF or because leaseholders have already paid-up funds in anticipation of works starting? The answer seems to be that the amendments come too late for those buildings, but that they will still benefit from the support offered.
2. Even if there is a statutory waterfall put into place, what happens if there is still not enough money to do remedial works? The works will not get done unless all the money to pay for them is available when the contract is signed. As explored in further detail below, in buildings where there are many buy-to-let investors, or where there are leaseholders who simply cannot pay to the level of their caps, what happens if the money required cannot be raised?
3. What happens if leaseholders have already reached the level of their capped payments but waking watches are still required? If the waking watch is withdrawn there is a risk that the local fire authority could issue a prohibition order and require the building to be evacuated. A waking watch imposed at the behest of an insurer may also have to continue to maintain cover. As discussed below, this aspect of the cap requires further work.
4. What counts as “cladding” and what counts as “non-cladding”? The Building Safety Fund money offered to date has been limited to a tightly defined definition of “external wall system”. People have found this definition restrictive. For example, that the cladding on their building does not qualify but they have insulation regarded as dangerous, so they have been left without any help. Will this be repeated in the regulations made under these new amendments?
5. Will today’s announcement mean that we see unscrupulous landlords rushing to start works before these new measures kick-in? The answer appears to be that there are anti-forestalling measures that protect leaseholders in residence in an affected property as at 14 February 2022, together with landlords with one affected rental property as at 14 February 2022.
6. Will the new caps be seen by the leasehold sector as a target they can aim to hit without too many questions being asked? Will institutional freeholders plead poverty, or engage in litigation, to avoid paying their share? Are leaseholders still going to be in the position of having to pay money to remediate buildings that do not actually require remediation, or at least not remediation of the type being undertaken?
7. Finally, we know from years of bitter experience of the leasehold sector that unscrupulous freeholders and managing agents typically ignore anything – whether written in law or written in the terms of leases – that does not suit them. There is a risk that the new legal provisions will simply be ignored, and leaseholders will still be presented with uncapped bills. Is the government going to put serious effort into enforcing this new law, or will the burden fall on ill-equipped leaseholders?
If I sell my flat, will the buyer get the protection announced today?
There appears to be an issue with the drafting of the amendments. The protections apply to “qualifying leases”. Part of the test as to whether a lease is a qualifying lease depends on the leaseholder being in occupation of the property on 14 February 2022. The cladding protection appears to be linked to a residence test that must be satisfied on 14 February 2022, so it may not be something that can be passed on to future buyers. The non-cladding protection is expressed using a different form of words, so appears to apply to whoever is the leaseholder at the date of the bill arriving, including future purchasers.
This is something that will need to be crystal clear to avoid destabilising the property market.
Will leaseholders have to pay?
As explained above, it is not necessarily the case that leaseholders will have to pay anything. The £10,000 and £15,000 figures that have been commented on publicly are backstop figures. They will apply only if developers, cladding manufacturers and freeholders do not contribute as part of the waterfall the government envisages.
Even when they do apply, the backstop figures consider money that leaseholders have already paid for remedial works (including waking watches) over the past 5 years up to and including today.
Unlike with past announcements, the latest announcement is backed with legal powers to compel developers, cladding manufacturers and freeholders to pay. These go far beyond the current law. If they work, they will drag in liquidated developers and freeholders with no assets, by enabling assets transferred to associated parties to be pursued.
As explained in detail below, the amendments are not perfect. There is more work to do. They are, however, a significant step forward.
What does seem clear is that where buildings are already completely, or substantially, remediated, there is no mechanism for an automatic refund. Leaseholders’ only option would be to pursue a responsible party under one of the new civil claims being created by the amendments today.
Why do leaseholders have to pay?
Today’s announcement is, of course, no comfort to the many leaseholders who are left paying for waking watches and extortionate buildings insurance while we wait for these new provisions to come into force.
The announcement is also of no comfort to those who have already paid, or who are most of the way through paying, for remedial work.
It is worth remembering that in the last major failure of construction in this country – that related to Precast Reinforced Concrete houses – the state only paid up to 90% of the cost of repairs. While it remains to be seen what percentage of the cost leaseholders affected by cladding and fire safety issues must pay, it now appears that there is a chance that they will be no worse off than other homeowners assisted by the state in the past.
It is also worth noting that investors who lost their life savings in the recent London Capital & Finance scandal only received compensation from the state equivalent to 80% of their losses up to £68,000. That scandal also involved a regulatory failure, in which risky mini-bonds were marketed as safe-as-cash ISA investments. Those investors were nevertheless not made whole.
Many affected leaseholders (including me, and I face a bill of up to £15,000) will be angry that they are expected to pay anything toward the costs of non-cladding remediation, even if it is as a backstop. The non-cladding defects situation is not of their making. It is the product of the construction industry’s greed and negligence. It is also the product of decades of regulatory failure under successive governments.
Leaseholders had no way of knowing before they bought their flats, short of undertaking the impossible task of cutting into internal walls and poking around in voids, that what they were buying had these internal safety defects. In a just world, leaseholders would not be paying a penny piece for non-cladding defects.
We do not live in a just world. We live in an imperfect world in which we must try to get the best measure of justice we can. Often, as today, we find that the best is still the enemy of the good.
We can take comfort from the fact that we have moved from a situation of uncapped costs to a system of capped costs. We are promised that costs will be capped at no more than £15,000, in most cases. While that is no small amount of money, there is now the hope that new legal tools will deliver full cost relief – for both cladding and non-cladding defects – to affected leaseholders. The hope is that these backstop caps will never be triggered in most cases.
The caps include some costs related to remediation (including waking watch costs) that leaseholders have paid already, meaning that – if this new legal engine runs as intended – they may not have to pay anything.
As explained in further detail below, there is still work to be done to improve the solution. There is still a risk that buildings requiring remediation will not be able to raise the necessary funds, even after today’s announcement. If funds cannot be raised then the legal caps may exacerbate, rather than solve, the problems faced by leaseholders.
The hope is, now that the government is poised to introduce viable legal options to force developers and cladding manufacturers to pay, that they will take over responsibility for affected buildings. This will hopefully lead to a solution where leaseholders do not have to pay anything, capped contribution or not.
The risk of huge, uncapped costs has bedevilled the market for flats in recent years. If the situation had continued, there was a risk that some banks would have to have started to materially write down the value of their mortgage books.
Now that costs leaseholders must pay are being capped, the government’s clear expectation is that mortgage lenders and surveyors will take a more realistic view of how affected properties are to be valued. Whether this will be translated into action that will unblock the housing market remains to be seen.
When will these protections become law?
The protections apply from today but will not actually become law until two months after the Building Safety Bill obtains Royal Assent. That is likely to mean June or July 2022.
The technical term for this is anti-forestalling. The protection is needed urgently. We are already aware of landlords pushing through works even before waiting for the detail of this announcement, for example:
What if the cap amounts are greater than the value of my contribution due under the lease?
Most modern leases will apportion costs to different flats based on floor area. This normally results in a percentage figure payable by each leaseholder toward each schedule of service charge expenditure.
In cases where the leaseholder caps are triggered, running the service charge machinery may produce a figure for a leaseholder that is less than the cap. It would be – barring any challenge as to reasonableness – the leaseholder’s contractual obligation to pay that amount.
But what would stop an unscrupulous Landlord demanding more than the amount calculated under the terms of the lease? Nothing. A simple change could be made to the amendments to prevent this from happening. The amendments need to prescribe that the leaseholders’ obligation is limited to the lower of the value of the cap or the value produced by the service charge machinery under the lease.
What about the retired or the disabled who are asset rich but have no or limited incomes?
This may need further thought. Not everyone living in an affected property has a large income. Depending on the valuation mechanism, leaseholders who have lived in properties for a long time where values have appreciated sharply may have an asset worth far more than their income.
Further thought may need to be given as to whether the caps should apply to asset rich but income poor households.
Why the cliff edges in the caps?
The current caps jump significantly for properties over £1 million and for properties over £2 million. The caps increase from £10,000 or £15,000 to £50,000 and then to £100,000.
Having a property worth £1 more than the threshold can result in a significant change in liability. This feels unfair when a landlord with two properties worth £999,999.99 each gets a £15,000 limit when two separate properties end up paying £200,000. All the properties involved in this example could be in the same block.
Depending on how the properties are valued, this may be a more significant issue than the government expects. The people living in these properties may also be victims of circumstance. They could be retired with no cash income sufficient to pay a £50,000 bill, even if it spread over 5 years. The property may have appreciated significantly in value since it was first bought, many years ago.
One way of overcoming this issue would be, as is already the case with the tapered withdrawal of income tax personal allowances and pension annual allowances, is to adopt a formula that gradually increases the value of the cap, rather than changing it suddenly.
For example, instead of a cliff-edge change from £15,000 to £50,000 at the £1 million valuation point, the additional £35,000 could be spread so that the cap increased by £3,500 for every £100,000 (or part thereof) the value of the property exceeded £1 million. Someone with a property valued at £1,000,001 would therefore pay only £18,500 instead of £50,000.
What if there is not enough money to do the works?
This is the key issue. No building is going to be remediated unless all the money is available at the time the works are due to start.
For example, there may be buildings where there are only non-cladding defects. If the bill for remediation is £10 million and there are 250 flats, then that currently means leaseholders must pay £40,000 each.
If leaseholders are not obliged to pay more than £10,000 each, so £2.5 million in total, where does the remaining £7.5 million come from?
The hope is that this remaining £7.5 million can be extracted from a developer or the freeholder. But what if they do not pay? In such cases, the works could be left undone, which would be in no-one’s interests. How many of these buildings exist?
A similar situation will arise in buildings where there are many buy-to-let investors who either have multiple flats in the same building, or multiple flats elsewhere. They only get the benefit of the cap for one rental property. That may preclude all the money being put into place.
A similar issue has already arisen in some buildings in relation to the State Aid limit (£350,000 per undertaking). That State Aid rule will continue to apply, in addition to the limitation on non-cladding costs for landlords with more than one rental property.
It may also be the case that by imposing liability on freeholders, who have to date been able to demand unlimited amounts of money from leaseholders, finally focusses attention on cost-benefit analysis at each building.
It may be that freeholders who are now expected to put their hands in their pockets decide that the costs versus the benefit (the benefit being avoiding a fire that may have only a negligible risk of occurring) do not justify the works after all, particularly if it means the freeholder spending its own money.
Freeholders may also start to propose different, cheaper solutions. They may choose not to go ahead with works. How successful these changes will be depends on how the mortgage and insurance market responds.
Won’t setting a cap mean that there is effectively a floor on how much developers and third parties will contribute? Leaseholders will always end up having to pay at least the value of the cap?
In negotiated solutions, there is a risk that the cap will become a floor. Third parties may offer to reach a negotiated settlement on the basis that leaseholders pay the full value of their caps. Then it becomes a question of whether it is worth expending legal fees in the hope that this will result in a judgment that justifies the expense.
It is important to remember, however, two things. The first is that institutional freeholders are now potentially on the hook to pay for anything that they cannot pass on to leaseholders. The only limit on their exposure is whether they meet an as yet unspecified affordability test.
We are promised that there will be a statutory waterfall, so these freeholders must pay their share before they can call on leaseholders. That means that they now have an incentive to pursue solvent third parties to avoid having to pay themselves. Such institutional freeholders’ contributions are uncapped, so if they can recover the full cost from third parties then they now have an incentive to do so.
The second issue is how the introduction of the new powers affects the ongoing negotiations with the government. The large developers now have an incentive to agree voluntarily to pay for all defects in all buildings they have constructed, as the government is demanding.
Of course, this will only help where there is a developer either caught in the deal negotiated with the government or else solvent and with assets that can be pursued. Other buildings may still be in a difficult position, particularly where the freeholder refuses to pay.
What happens if I have already paid for remediation costs or waking watch costs above the level of the caps?
There is no automatic refund mechanism in the amendments.
There are, however, new rights to pursue construction product manufacturers and cladding manufacturers for damages related to building defects, including economic losses sustained because of the defects.
This is significantly better than the current causes of action on offer, which would have required a contractual connection – or the assumption of a duty of care – to end leaseholders. That was never a realistic option under the current law.
But who will pay if we still need a waking watch?
One issue with the amendments is that they impose a cap on waking watch costs where these costs will still be ongoing. The amendments limit the liability to pay service charges covering these waking watch costs.
But if the waking watches are stopped, this may lead to issues such as prohibition orders and / or withdrawal of building insurance cover.
The wording of the amendments needs further work to avoid a sudden stop in waking watch costs, whilst balancing the rights of tenants who have already paid up to the level of the cap.
What if these amendments pass and my landlord still sends me a service charge demand for more than the cap?
The amendments will come into force in June or July (perhaps earlier), but the protection applies to all leaseholders living in an affected property, or with one buy-to-let property as at 14 February 2022.
As we all know, some landlords and managing agents routinely ignore the existing law. There is no reason to believe that they will not do the same in relation to this law. The real issue with leasehold is that unscrupulous landlords and managing agents usually already have leaseholders’ money. If they want to take that money in breach of the law, then it is usually up to leaseholders to fight them to get it back.
Common examples include failing to produce annual service charge accounts and ignoring, or imposing unreasonable restrictions, on the right to see receipts and documents underlying the accounts.
Overcoming these roadblocks requires the leaseholder to bring an application to the First-tier Tribunal. The amendments are, unfortunately, no different. There is nothing stopping an unscrupulous landlord or managing agent from issuing a bill that does not comply with the new law and waiting until a leaseholder challenges the bill.
If an unscrupulous landlord really wanted to force the issue, we would be left with the unedifying sight of that landlord using the leaseholders’ money to argue against the leaseholders’ interests. That is because most modern leases will allow the landlord to charge leaseholders the legal costs incurred in making or defending such applications.
The proposed leaseholder protection amendments could be further improved by automatically preventing landlords from recovering their legal costs, regardless of the terms of the lease, where they attempted in any litigation to defend bills that were found to be subject to the cap.
Such a built-in costs punishment would give them pause for thought before chancing their arm. The lack of cost risk for the landlord is what drives much of the unreasonable behaviour seen in relation to service charge challenges and other matters that involve litigation between residential leaseholders and landlords. It is a protection that should be extended more widely in the leasehold world.
Regardless of any changes to the text of the amendments, the government should also consider what it could do to make an example out of the first unscrupulous actor to try issuing a bill, or trying to seek forfeiture, without complying with the new rules. That would then serve as a warning to the rest of them.
What if I live in a building owned or managed by residents?
The amendments apply to relevant buildings. That includes all buildings except commonhold land or buildings where the freehold or head leasehold interest has been acquired under Chapter 1 of Part 1 of the Leasehold Reform, Housing and Urban Development Act 1993).
Leaseholders in resident owned buildings falling into the categories listed above are therefore not covered by the caps on non-cladding costs. That is because the leaseholders are the owners, just wearing a different hat. Ultimately, the responsibility rests with them as the owners of the building.
Leaseholders in resident-owned buildings will still be able to apply for cladding assistance. The issue will then be financing the non-cladding costs.
The non-cladding costs will have to be extracted from third parties, either by voluntary agreement or by using the new legal remedies.
This leaves those buildings, looked at as buildings, in no different position to those owned by institutional freeholders, who could potentially have to pay all the costs. Resident owned buildings may lack the resources to raise funds to pursue legal remedies against third parties.
Not all types of residents owned (enfranchised) buildings are caught by the definition above – for example those acquired under compulsory acquisition orders, by exercising a right of first refusal, or by voluntary agreement between landlord and leaseholders.
This is a gap that will need to be addressed. Otherwise, those buildings will find that they are in the bizarre position of being subject to caps, but then having to make demands on the same people (or most of the same people), most likely in their capacity as shareholders of the company owning the freehold or head lease in question.
A further issue arises in relation to Resident Management Companies or Right To Manage companies. These have obligations to maintain the building under the lease. They are therefore captured by the freeholder contribution provisions (which attaches to whoever has a maintenance obligation). The affordability test – when spelled out – may help here. These companies have no assets and no income apart from residents’ money under the service charge.
If the affordability test does not help, then further work will be required to the types of relationship caught by the freeholder contribution provisions. Amendments to the text may be required.
What about the right to go after associated companies?
The amendments expand out the rights to pursue various civil and regulatory claims from the original counterparty (developer, landlord) but also to the target’s associated companies.
This is designed to circumvent the rule that each company has its own separate legal personality. This rule is often abused by establishing a special purpose vehicle with no assets to shield its owners from liability for the vehicle’s actions.
The amendment is welcome, but looking behind one company and into another (what lawyers call “piercing the corporate veil”) is not something the courts do lightly. These provisions are likely to be scrutinised very closely by lawyers for targets of the new claims to try and escape liability.
The amendments contain a bespoke definition of “associated company”. This appears to be like that contained in section 1162 of the Companies Act 2006, but may not be the same.
There is some risk in using a bespoke definition instead of the existing section 1162 definition. There is a large body of case law around that definition. The bespoke definition is not tested and may not produce the same results as the established case law.
The drafting is not perfect. There may be perfectly innocent companies caught as associated persons, for example where instead of selling the freehold as an asset to residents, the company owning the freehold has been transferred to residents. The current drafting may catch such a company as liable to pay contributions because it has been associated previously with the developer. That would not be what the government intends.
What about the new powers to go after cladding and construction product manufacturers?
The government proposes to amend the law to introduce two new types of claim against cladding and construction product manufacturers.
The first is a new type of civil claim. This new civil liability attaches where the manufacturer of a cladding or construction product has failed to comply with an applicable legal requirement in force at the date of construction, or the date the material was attached to the outside of a building.
Making misleading statements about cladding products also attracts liability, with “misleading statement” to be defined in regulations. This appears to be targeted squarely at those cladding manufacturers who have been found to have falsified safety tests deliberately.
The new civil claim would, if proven, require the perpetrator to pay damages to the claimant. This includes a freeholder who must pay under the new waterfall provision. Freeholders are therefore incentivised to pursue these claims.
There is a limitation period of 30 years to pursue claims in relation to existing buildings. New buildings will be subject to a 15-year limitation period.
The second type of claim (called “costs contribution notices”) allows the government to make an order directing a cladding or construction product manufacturer to make contributions toward remediation of buildings where the manufacturer has been fined or sentenced for breaching product safety standards.
Costs contribution notices therefore piggy-back off the existing criminal enforcement process.
What about the new powers to go after developers?
As with the cladding and construction product manufacturers, there are various new civil and regulatory means of pursuing developers.
The new civil claim is that the High Court is empowered to make an order (called a “building liability order”) against a company associated with a developer who has failed to pay, wherever the court considers it just and equitable to do so. These orders can be made against active associates of companies already in liquidation, or which have previously been dissolved.
Again, the efficacy of this provision will depend on how robust the associated company mechanism is in practice. Expect there to be heavy litigation if these powers are ever used to break into complex corporate webs.
What about the new powers to go after landlords?
Landlords can be made subject to new regulatory orders called remediation orders. These are made by the First-tier Tribunal on the application of the government or the new Building Safety Regulator, a local council, or a local fire authority. These orders require a target landlord to undertake and pay for specified types of remediation work.
A new type of civil liability is established through a mechanism called a remediation contribution order. This order, which can be made by the First-tier Tribunal, can force companies associated with a landlord to pay toward the cost of remediating certain defects. Leaseholders and freeholders
Again, as with the other sections, the power to pursue associated companies depends on how robust the associated company wording proves to be in practice.
Most modern leases will allow obligations of the landlord imposed by acts of regulatory authority to be passed on to leaseholders through the service charge. That is, unless the acts in question are caused by the landlord’s breach of its statutory obligations, or breach of the terms of the lease.
The new leaseholder protection amendments will require careful review to ensure that costs on landlords triggered by these new claims do not fall to be paid by leaseholders through the terms of the service charge, particularly in cases where the landlord is not at fault.
What about the new insolvency power?
In addition to the ability to pursue landlords through remediation orders and remediation contribution orders, the government proposes to amend the law to entitle the liquidator of an insolvent landlord to pursue associated companies of the landlord. The aim of the amendment is to increase the size of the pot available to distribute to creditors.
There are legal issues with the drafting. Corporate insolvency is a complicated field of law and the full technical detail is beyond the scope of this article.
In simple terms, the issue is that the claims the government is creating rank alongside those of other unsecured creditors, meaning that they are at the end of the queue. By the time a company enters liquidation, there is normally only a negligible prospect (if any) of unsecured creditors being paid anything. All creditors of the same class will share equally in the pot.
Other technical issues with the clause are related to the fact that it is only triggered by liquidation. There are other insolvency processes that could be deployed (particularly administration, Company Voluntary Arrangements and Part 26A arrangement or reconstruction plans) that could potentially be used to circumvent the current drafting adopted by the government.
It may be possible to pursue associates of companies, whether they have entered liquidation, under existing statutory provisions, such as section 423 of the Insolvency Act 1986. This involves creditors pursuing claims to reverse transactions entered with the purpose of either putting assets beyond the reach of creditors or otherwise prejudicing creditors’ ability to make claims.
There is a Court of Appeal authority that an otherwise lawful dividend can, in the right circumstances, be a section 423 transaction.
It is possible to amend the clause to give it more bite, such as by changing the priority of the claim and expanding it to include other insolvency processes.
But I thought the Polluter Pays Amendment would have meant leaseholders did not have to pay anything at all? Why could the government have not adopted that approach?
The simple answer to that question is “no”.
The detailed reasons are explained in this article from last week:
It is yet to be seen whether the Polluter Pays Amendment will be tabled in the House of Lords. If it is, it is unlikely to become law because it does not enjoy government support.
The bottom line?
Today’s announcement involves a radical intervention in law, and in favour of leaseholders. Lease terms are being torn up. Developers, cladding manufacturers and freeholders have been brought into the frame. The government is putting serious legislative muscle into its on-going wrestling with developers and cladding manufacturers.
Nevertheless, the solution announced today is a compromise. As with all compromises, no-one will be entirely happy with the outcome. Leaseholders will be angry at being on the hook for potentially material financial contributions to non-cladding defects unless money can be found from elsewhere, perhaps relying on the new legal remedies the government proposes to introduce.
No doubt today’s announcement has been received with weeping and gnashing of teeth in the boardrooms of developers, ground rent investors and cladding manufacturers. For too long they have evaded scrutiny, hiding respectively behind building control certificates, lease terms, or meaningless platitudes about regulatory failure. At long last, today sees the beginnings of a period of consequences for them.
We are not yet at the finish. There is still more to be done to implement the solution outlined by the government. The efficacy of that solution depends on crucial details that have yet to be announced, including addressing the issues outlined above.
We are, however, significantly further forward than we were last night. As things stood last night, leaseholders in buildings of any height faced uncapped costs for non-cladding costs. Those in buildings 11-18 metres tall were waiting for details of how they would be helped with their cladding costs. We now see details of assistance for them.
It will remain a bitter disappointment that leaseholders with the same issues in buildings below 11 metres tall (or under 5 storeys) are not receiving any help at all. That seems like an arbitrary distinction.
For the time being, leaseholders continue to have to walk a difficult path. We now have an idea of what the destination will look like. It is far from the promised land, but it appears to be a great deal better for most leaseholders.