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A brief guide to who pays for building safety remediation work within a leasehold property

The Building Safety Act (BSA) was introduced following the Grenfell Tower tragedy and is designed to improve the safety and standard of buildings. Prior to the BSA there were a number of stories in the press that highlighted that leaseholders were being required to pay for works to address fire safety in their blocks and that on occasions such contributions were running into tens of thousands of pounds.

One of the elements of the BSA was introduced to address this scenario and look to protect certain leaseholders from having to make such contributions.  

Within this article, our Head of Litigation, Liz Rowen, details several scenarios and criteria which are crucial for managing agents and freeholders to consider when looking to establish who is required to contribute towards any costs associated with works that are required under the BSA and whether the leaseholders are protected from contributing to such works.

To start with it is worth us providing the following definitions for future reference: 

Relevant defect – A defect that puts people’s safety at risk from spread of fire or structural collapse and has arisen from work done to a building during its construction or any further works (such as refurbishment, remediation or conversion of a non-residential building into a residential building) between 28 June 1992 and 27 June 2022. Further information on a relevant defect can be found here

Relevant building – A building that is at least 11 metres in height or has at least five storeys, contains at least two dwellings and is not a leaseholder owned building. 

Qualifying leaseholder – A leaseholder within a building above 11 metres or five storeys and on the 14th February 2022 (the qualifying date) the property was their main home, meaning it was the home where they spent most of their time or the leaseholder owned more than 3 dwellings in the United Kingdom in total.  

Non-qualifying leaseholder – Simply put, a leaseholder who doesn’t meet the criteria previously mentioned of a qualifying leaseholder. 

The leaseholder protections are contained ins Schedule 8 of the BSA, and this schedule creates what has become to be referred to as the statutory funding waterfall which helps ascertain who should fund the relevant works.

It should be noted that leaseholders are protected from paying towards all cladding relating costs regardless of the outcome of the statutory waterfall tests.

The key to Schedule 8 is that it provides a series of criteria that should be worked through to establish who will fund relevant works. Each step should be considered and where a particular scenario applies, there is no need to move further through the waterfall.

The developer test

We begin by looking at the developer test, this states that leaseholders are protected from paying towards remediating a relevant defect within a relevant building if, on 14 February 2022 (the qualifying date), the building owner was, or was associated with, the developer. Further details can be found on what an associated company is and the definition of a ‘building owner’ here

This means that if the above criteria are met, neither qualifying or non-qualifying leaseholders are required to contribute towards the costs of relevant defects created during construction or refurbishment of the building, or for interim measures, such as waking watch. 

It will be important to consider timelines and development and ownership of a building here, particularly if the building owner had linked to the developer the qualifying date.  This can become rather complicated and we would urge advice is sought if there are any concerns about the ownership of the building and the developer.

If the above scenario does not apply, we move to the next test.

Contribution condition

The BSA states that leaseholders do not have to make a contribution to funding the remediation of a relevant defect if the relevant landlord met the contribution criteria at the relevant time. The contribution criteria is cited as being more than £2m per relevant building. This relates to building owners or their associated landlord group.

There are some exceptions to the application of the contribution criteria and it will not apply where the landlord is:

(a)a private registered provider of social housing

(b)a local authority or

(c) a prescribed person.

If the contribution criteria does not apply, we move to the next test.

Low value lease

This considers the value of the properties on the qualifying date, as qualifying leaseholders whose property on the qualifying date was valued at less than £325,000 for properties in Greater London, or £175,000 elsewhere in England, have no obligation to contribute towards the costs. 

If the leases are valued over the thresholds, we move to the next test.

Limit on Service Charges

If the costs remediation works that would otherwise be recoverable as a service charge become payable, the amount that is payable by a qualifying leaseholder is capped inso far as it will not exceed the permitted maximum.

The permitted maximum is £15,000 in Great London and £10,000 everywhere else, save where the value of the qualifying lease exceeds £1m but does not exceed £2m. In this scenario, the permitted maximum is £50,000. Where the qualifying lease exceed £2m in value the permitted maximum is £100,000.

There are also provisions in respect of share ownership leases which we have not discussed here.

If the costs of the remedial works are caught by the permitted maximum provisions do leaseholder have to pay this in a single payment. In short, they do not.

In any 12cmonth period ending on the day the service charge fell due, a leaseholder will only be lijited to paying up to 1/10th of the permitted maximum. Therefore the leaseholder could be limited in the case of Greater London to paying £15,000 per year for example.

Legal costs

Any legal costs incurred by the building owner when looking to recover any remediation costs cannot generally be passed to the leaseholders, and this includes costs related to settling disputes in relation to remediation.

Reserve funds

Any money already collected by the freeholder before the qualifying date and still available, for example a reserve fund, can be used for remediation and interim measures, but should not be spent unless the work is urgent, for example a waking watch to prevent a building being emptied. However, this does not stop leaseholders seeking a remediation order to recover these funds from the building owner. 

The BSA is a legal minefield and littered with complexities.  If any party to a lease is effected by the issues described about we would suggest seeking legal advice.

We hope the considerations detailed above are of use to you, but if you have any further questions regarding funding remediation works or the Building Safety Act, please get in touch and one of our experts will be happy to help. 

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With hundreds of years’ worth of combined experience, our experts have dealt with nearly every leasehold property matter you can imagine. If you’re currently in need of legal support or advice, please get in touch.

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