1. There is a new legal framework regarding service charge restrictions pursuant to Schedule 8 of the Building Safety Act (‘BSA’). This applies to service charges relating to building and fire safety related defects. These restrictions either prohibit or limit the degree to which a leaseholder will be liable to pay for works relating to such defects.
2. These new provisions came into force on 28 June 2022 and the protections apply to all service charge demands irrespective of when the demand was issued (so long as the demand remains unpaid). Agents and landlords cannot pursue demands that relate to historical remediation costs that fall within the scope of the BSA until a Landlord’s Certificate is issued (about which see 7 – 10 below). The protections will apply to properties based on the ownership position as at 14 February 2022 (with the status as at 14 February 2022 being transferrable to future buyers).
3. The BSA separates the cost of removing unsafe cladding from other remediation works and puts building safety costs into three main groups:
- The costs relating to ongoing safety measures that are required to comply with the obligations on building owners which are set out in the BSA. These are not related to remediation works.
- The costs of removing unsafe cladding.
- The costs of remedying “relevant defects” in “relevant buildings” where the defects are non-cladding defects. Schedule 8 of the BSA deals with the caps and contributions and parties cannot contract out of these restrictions.
4. In order to determine whether Schedule 8 to the BSA applies, a landlord will need to consider:
- is the building a “relevant building” (i.e. a self-contained building (or part) that contains at least two dwellings and is at least 11 metres high or has at least five storeys)?
- is the defect that needs to be remedied a “relevant defect” (i.e. a defect that arises as a result of anything done (or not done) or used (or not used) in connection with “relevant works” that causes a risk to the safety of people in or about the building arising from the spread of fire or the collapse of the building or part of it? This includes anything that was done (or not done) in the provision of professional services in connection with the works.
- is action required to remedy the relevant defect and is such action a “relevant measure”? A “relevant measure” is a measure taken to remedy a relevant defect, prevent a building safety risk from materialising or reduce the severity of any incident resulting from a building safety risk caused by the relevant defect.
5. The BSA has three main service charge restrictions:
- Restrictions in all leases regardless of the height of the building the property is situated in. The Building Safety Act 2022 extends the landlord’s duty to recover reasonable costs from third parties before seeking to recover then from leaseholders under a service charge – section 133 amends section 20 of the Landlord and Tenant Act 1985. The steps that will need to be taken (and be evidenced) by a landlord are:
a. to take reasonable steps to ascertain whether any grant is payable (and if so to obtain that grant);
b. to take reasonable steps to ascertain whether monies can be obtained from a third party (and if so, to obtain monies from a third party), this will include:
i. under any insurance policy;
ii. under any guarantee or indemnity;
iii. pursuant to a claim against a developer or anyone involved in designing or carrying out works on the building.
- Restrictions on cladding related service charges where the height of the building is over 11 metres or 5 storeys. ‘Qualifying Leaseholders’ (see below for more about that) will not have to pay anything towards cladding remediation. Cladding remediation means the removal or replacement of any part of a cladding system that:
a. forms the outer wall of an external wall system, and
b. is unsafe.
In summary therefore, no service charge can be levied in relation to cladding remediation on any leaseholder who meets the ‘Qualifying Lease’ definition and as such, they will not have to pay anything in service charges for cladding remediation in buildings that are over 11 metres or 5 storeys in height.
- Restrictions on non-cladding related fire safety service charges where the height of the building is over 11 metres or 5 storeys. In short, all non-cladding related fire safety service charges will be subject to further restrictions in the following circumstances:
- The landlord or an associate was responsible for the defects;
- The landlord meets the contribution condition;
- The lease value is below a certain amount;
- An overall cap on service charges in all other cases.
It will be the developers (which may include many landlords and building owners) followed by building owners and landlords (who are not otherwise classed as developers) who will now be the first port of call to pay for non-cladding historical safety defects, rather than leaseholders. Landlords will need to prove (and evidence where necessary) that there are no other routes to obtaining monies from third parties. The rules now prevent the passing on of costs to leaseholders where they are (or are associated with) the developer. Landlords (who are not an RP or a Local Authority amongst others) will not be permitted to from pass on any costs to ‘Qualifying Leaseholders’ where they have a net group wealth over the set threshold. Where these conditions are not met, costs for non-cladding defects and interim measures will be shared between the landlord and the leaseholder, unless a property has a value of less than £325,000 inside Greater London or less than £175,000 elsewhere.
Other leaseholders will see their service charges capped and spread over ten years. Their contribution will be capped at £15,000 within Greater London and £10,000 outside (save where properties worth over £1 million will make higher contributions (up to £50,000) and properties worth over £2 million will make a maximum contribution of £100,000). The caps are further reduced for shared owners as the cap will be in proportion to their equity share and any caps will be reduced by any service charge that has been paid in the last five years.
6. The restrictions in Schedule 8 of the Act do not apply to non-residential leases in the main because most of the restrictions apply only to ‘qualifying leases’. There is one exception to that however – no service charge is payable for remedying a defect if the landlord (or an associate of the landlord) was responsible for the defect within the specific (but wide) meaning of the BSA. A ‘Qualifying Leaseholder’ is a leaseholder who meets the following criteria:
i. the property is in a building above 11 metres or 5 storeys;
ii. the property is the leaseholder’s main home (as at 14 February 2022); or
iii. the leaseholder owned no more than 3 UK residential properties in total as at 14 February 2022.
A leaseholder is also a ‘Qualifying Leaseholder’ if they have purchased their property since 14 February 2022 but the criteria outlined above was met on 14 February 2022.
7. The Landlord’s Certificate is a new certification regime under the Building Safety (Leaseholder Protections) (England) Regulations 2022 (‘the Regulations’) and the Building Safety (Leaseholder Protections) (Information etc.) (England) Regulations 2022. These Regulations have also been made under Schedule 8 of the BSA and place further restrictions on a landlord’s ability to recover service charges. This new process introduced by the Regulations must be followed where a landlord seeks to recover a service charge for certain types of works or if a leaseholder requests one).
8. The Regulations set out the form and content of the Landlord’s Certificate (Regulation 6 and Schedule 1). The Certificate must be in the prescribed form appended at Schedule 1 of the Regulations and is to be based on the circumstances of whoever was the relevant landlord on 14 February 2022.
9. Compliance with the Landlord’s Certificate regime is complex and time sensitive. A landlord must provide a certificate to a leaseholder in each of the following circumstances:
a. when the current landlord makes a demand to a leaseholder for the payment of a remediation service charge;
b. within four weeks of receipt of notification from the leaseholder that the leasehold interest is to be sold;
c. within four weeks of becoming aware (either themselves or by notification from another person) of a relevant defect not covered by a previous landlord’s certificate; or
d. within four weeks of being requested to do so by the leaseholder.
10. These obligations exist even if the Landlord does not intend to make a demand. In short, if the Landlord does not provide a valid Landlord’s Certificate, they will be unable to pass any remediation costs on to the Qualifying Leaseholder. Landlords are required to provide evidence of their position if they believe they are exempt from bearing the full costs of remediation and failure to disclose information or dishonestly making a false claim may be a criminal offence. If the Landlord is unable to provide any of the information required, they must apply to other persons who are/were the relevant landlord(s) requesting the information.
For more information, please contact Lee Russell or Mark Foxcroft.