The cladding crisis has posed a number of difficult questions for social landlords. One of the most pressing is: can (and should) service charges be demanded from leaseholders for the costs of fire safety remedial works on blocks of flats?
The political dimension
With the Government's recent announcement of an increased £5bn Building Safety Fund to cover the cost of replacing unsafe cladding, you would be forgiven for thinking that questions of service charge recovery are no longer relevant. However, whilst the Fund covers the costs of cladding remediation, it is not currently expected to cover the cost of other fire safety works which may be discovered to be necessary by intrusive inspections (e.g missing cavity barriers and fire stopping), or works picked up by statutory fire safety inspections (eg fire door upgrades).
As things stand, there is ongoing uncertainty as to whether (1) the Government will extend its funding to cover associated non-cladding fire safety works; and (2) social landlords will need to issue to leaseholders large service charge demands, or whether these costs can be paid for in some other way (which itself may require case-specific consideration of charitable vires issues).
The legal dimension
Where social landlords wish to keep their options open to re-charge their leaseholders, the following matters need to be considered:
- Have any statements previously been made to leaseholders assuring them that they will not be re-charged for fire safety remedial works?
- Are the costs to be incurred recoverable under the terms of the relevant leases? (this step may be removed in due course as the draft Building Safety Bill introduces an implied obligation on leaseholders to pay building safety charges)
- Can the reasonableness of the costs (in relation to necessity, cost and quality) be demonstrated with supporting evidence to the satisfaction of a First-tier Tribunal in the event of a challenge brought by a leaseholder?
- Has there been section 20 compliant consultation?
- If there has not been section 20 compliant consultation, would a First-tier Tribunal dispense with the requirement to consult?
- If cladding replacement works are grant-funded, is the Social Landlords Mandatory Reduction of Service Charges (England) Directions 2014 applicable?
- For charitable housing associations, are there obligations under charity law? In most cases this will require recovery where there is a legal right to do so.
The future
Separate from issues as to the scope of the Government's Building Safety Fund, the draft Building Safety Bill introduces a new category of service charge called Building Safety Charges. The draft Bill also introduces the new roles of Accountable Person and Building Safety Manager, as well as numerous regulatory obligations (including the obligation to prepare and register a building safety case with the Building Safety Regulator). Given that the costs of compliance with the new Building Safety regulatory system seem unlikely to be centrally funded, social landlords should be thinking now about how to pay for the costs of compliance.
