Recovering Cladding Costs - Post Grenfell

Roger Hardwick is a Partner in the Residential Leasehold department at Brethertons. His work includes statutory lease extensions, collective enfranchisement and right to manage claims; freehold acquisitions; residential service charge disputes; applications to the First-tier Tribunal (Property Chamber) and appeals to the Upper Tribunal (Lands Chamber).

Recovering Cladding Costs – Post Grenfell

Following the aftermath of the Grenfell Tower tragedy in 2017, one of the most popular enquiries we receive is: “my block is clad with [insert combustible cladding] who is going to pay for its removal and replacement?”

General Principles

A crude rule of thumb is “if it isn’t in the lease, you can’t recover it”.

However, that would do a disservice to wealth of case law on this topic. A summary of some of the general principles laid down by the Courts and Tribunals, over the years, can be found below:

  1. There is no special rule for interpreting residential leases. The question is an objective one: what would a reasonable person understand the intention of the parties to the lease to have been, having regard to the wording used and the factual context, but disregarding any evidence of the actual intention of the parties (Arnold v Britton [2015] UKSC 15)?
  2. If the wording is clear and unequivocal, that wording will be applied, even if the result is commercially onerous. If the wording is ambiguous and it is clear that something has gone wrong with the drafting, commercial common sense will have a greater role to play in assisting with the interpretation of a lease.
  3. If it is obvious that there has been a mistake, and it is clear what would be needed to correct the mistake, it is permissible to read a lease as though the mistake had been corrected.
  4. There are limited circumstances in which a Court will be prepared to imply a term into a lease, where it is necessary to give “business efficacy” to the contract, and if it is so obvious that it goes without saying. A provision permitting the recovery of costs associated with the replacement of cladding, or fire safety generally, is unlikely to be implied into a lease simply because it would be “unfair” to one of the parties.
  5. There are circumstances in which a Court can “rectify” a lease (as with any contract), where the lease did not reflect the common intention of the original parties to the lease; or where it did not reflect the intention of one of those parties, and the other party unconscionably took advantage of that misunderstanding. Again, applications to rectify are quite rare.

Finally, an application can be made to vary the lease of a flat (or leases of flats) under Part IV of the Landlord and Tenant Act 1987, in certain defined circumstances.

That is beyond the scope of this article.

Repair or Improvement?

It is unlikely that a landlord (or RMC, or RTM company, as the case may be) will be able to rely on its obligation to “repair” the building (and its corresponding right to recover the cost of repairs, as a service charge), to recover cladding costs.

The obligation to “repair” (and the consequent ability to recover the cost of works of “repair”) only arises where the building is in disrepair, i.e. where it has deteriorated from a previous physical condition. If the building was defective, as constructed, but it has not deteriorated from its “as built” condition, it is not in disrepair.

There are a significant number of reported decisions which address this point, but perhaps the most well known is a case by the name of Post Office v Acquarius Properties [1987] 1 All ER 1055. In that case, there was a defect in the structure of the basement of the building by reason of porous concrete and defective construction joints used in the construction of the building which caused water to enter the basement whenever the water table rose. The Court held that there was no deterioration in the condition of the building, so no disrepair.

Of the more recent decisions: Southwark L.B. v Leaseholders of the St Saviours Estate [2017] UKUT 10 (LC) deserves a mention. The local authority had sought to recover the cost of replacing the flat entrance doors and communal doors in the development, with doors which provided 30 minutes fire resistance (fire standard “FD30”) on the grounds that they did not provide adequate protection in the event of a fire. When they were constructed, in the 1960s, the doors provided 20 minutes fire resistance (FD20); however, most of the doors had been modified by the lessees (for example, by the installation of letterboxes), which, the local authority argued, had lead to the doors falling below the required standard. Although the Upper Tribunal accepted that, in theory, a door may be in “disrepair” if it is proven that it has deteriorated in comparison to an “as built” standard (such as FD20), in this case, the evidence was insufficient to demonstrate that. None of the doors had been properly assessed by a suitably qualified fire risk assessor. The cost of replacing the doors was, thus, an improvement, and irrecoverable.

A more interesting question is whether a right to recover the cost of “renewing” the building would extend to removing and replacing combustible cladding.

The closest case is Crédit Suisse v Beegas Nominees Ltd [1994] 1 EGLR 76. A covenant to “renew” was held to extend to replacing the entirety of the cladding of the building (which was defective) with a new and redesigned system. However, in that case, the cladding was causing disrepair (by water ingress), so it is distinguishable, and there are other cases which apply a more restrictive definition to the term.

It should be noted that the defective design, in that case, had caused water ingress and damage to parts of the building. That could be a relevant distinguishing feature. It is settled law that the cost of “repairing” a building may extending to correcting an inherent defect, where that results in damage or disrepair to the building, and it is reasonably necessary to correct the defect to prevent further disrepair from occurring.

“Statutory Compliance” Clauses

It may not be necessary to overcome the “improvement” hurdle, or rely on an obligation to repair, renew, rebuild etc.

It is not uncommon for a lease to contain a provision which permits the recovery of costs associated with “complying with the requirements of statute”, or something similar.

It is strongly arguable that the removal and replacement of ACM cladding which has been found to have no fire retardant properties would fall within the duties of the “responsible person”, under the Regulatory Reform (Fire Safety) Order 2005, which was created pursuant to s.6 of the Regulatory Reform Act 2001.

Article 8 of the 2005 order provides for a general duty on the “responsible person” to take such general fire precautions as may reasonably be required in the circumstances of the case to ensure that the premises are safe. Those include (but are not limited to) “measures to reduce the risk of fire on the premises and the risk of the spread of fire on the premises”. It would be surprising if that duty did not extend to the removal and replacement of combustible cladding.

Where the premises is not a workplace, by Article 3(b), the “responsible person” is defined as:

(i) the person who has control of the premises (as occupier or otherwise) in connection with the carrying on by him of a trade, business or other undertaking (for profit or not); or

(ii) the owner, where the person in control of the premises does not have control in connection with the carrying on by that person of a trade, business or other undertaking.

The “premises” can only be the Building, excluding the flats, which are “domestic premises” and thus excluded from the effect of the Order by virtue of Article 6(1)(a).

In a traditional bipartite lease, where the landlord owns and is responsible for repairing and maintaining the structure, exterior and common parts of the block, the “responsible person” will clearly be the landlord.

Where the responsibility for managing and maintaining the structural and common parts of the block rests with a residential management company (which as entered into the tripartite flat leases as a third party), or an RTM company, it is likely that that company will be the “responsible person”.

The words in parentheses in Article 3(b)(i) (“for profit or not”) indicate that the type of “undertaking” which may fall within the scope of the 2005 Order is very broad. This corresponds with the explanatory statement made by the Office of the Deputy Prime Minister, at Paragraph 45: the “responsible person” will be whoever is responsible for the safety of the persons who use the premises.

The enforcing authority (e.g. the local fire authority) has a wide range of powers available to it, including the power to carry out an inspection; and the power to issue an alterations notice under Art.29 (requiring the premises to be altered in some way), an enforcement notice under Art.30 (requiring steps to be taken to remedy a failure to comply with the 2005 Order), or a prohibition notice under Art.31 (prohibiting or restricting the use of the premises).

It is an offence for a responsible person to fail to comply with any of the duties imposed by Articles 8 – 22, or an alterations or enforcement notice: Article 32. By Article 32(8), where the responsible person is a company an offence is also committed by every director, manager, secretary or other officer of the company, where the offence was committed with the consent or connivance, or can be attributed to some neglect on the part of, the director etc. However (except in the case of a breach of Articles 8(1)(a) or 12), it is a defence for the person charged to prove that he took all reasonable precautions and exercised all due diligence to avoid the commission of such an offence: Article 33.

However, careful regard must be had to the precise wording of the “statutory compliance” clause.

In BHP Petroleum v Chesterfield Properties [2002] Ch. 12, the wording was very broad. It permitted the recovery of costs associated with “all statutes regulations and orders and all requirements, directions, codes of practice, circulars and guidance notes of or issued by any competent authority exercising powers under statute or royal charter and all directly applicable EC law and case law”.

If the clause in question only permits costs which are associated with a “requirement of” or formal “notice” given by a statutory authority, a mere recommendation or guidance note is not likely to be sufficient. It should also be noted that a “notification of fire safety deficiencies” (of the type issued by some fire authorities) is not a formal notice under the 2005 Order.

Even if the clause goes further than that and permits the recovery of the cost of complying with the “requirements of statute” (as distinct from “statutory authority”) a guidance note or recommendation may be a clear steer as to what is required to comply with statute, but it is not necessarily definitive. A tenant may seek to argue that the guidance note or recommendation goes too far (although, that would be a difficult argument to run, where the recommendation comes from a fire authority, in the light of the Grenfell Tower tragedy).

“Sweeper” Clauses

A “sweeper clause” (or “sweeping up provision”) is designed to capture, using general words, costs which are not expressly or specifically mentioned in the lease.

Although they can amount to a welcome “fall back” position, it is never a good idea to rely on sweeper provisions. The approach of the Courts and Tribunals has been unpredictable at best.

Landlords have historically found it difficult to recover the cost of substantial works or to provide significant services, where those matters might have been expressly referred to in the lease.

Works to external walls were found not to fall within the ambit of a sweeper provision in Jacob Isbiski & Co v Goulding & Bird Ltd [1989] 1 E.G.L.R. 236; and the cost of replacing windows was found not to be recoverable in Mullaney v Maybourne Grange (Croydon) Management Co Ltd [1986] 1 E.G.L.R. 70.

However, it is at least arguable that a clause by which the landlord can do and recover the cost of “such acts matters and things as in the absolute discretion of the Lessor may be necessary or advisable for the proper maintenance safety and administration of the Building” (italics added), or a similarly worded provision, would be sufficiently broad (as in Sadeh v Mirhan [2015] UKUT 428 (LC); and a similar clause was relied on in Assethold v Watts [2014] UKUT 0537 (LC)).

Service Charge Mechanism

This deserves a mention, because so many landlords and property managers continue to get it wrong: if the lease does not permit the recovery of a one off charge (sometimes referred to as a “surcharge”) for the lessee’s proportion of the whole anticipated cost of the remedial work, and your reserve fund is not sufficient to cover the cost, then you will have to include the cost in your budget, and recover on account payments in the normal way, at the dates specified in the lease: Southwark LBC v Woelke [2013] UKUT 0349 (LC).

If you are (or act for) an RMC or RTM company this may mean that you have no option but to wait until you have the funds to carry out the work. That may not be a particularly palatable prospect, if the local fire authority has recommended or even issued a notice requiring the company to carry out the work, or if significant sums are being spent on interim fire safety measures, such as a waking watch.

Cases

There have been two First-tier Tribunal (Property Chamber) decisions, which have addressed the question of the recoverability of cladding costs as a service charge: Firstport v Various Leaseholders of Citiscape (LON/00AH/LSC/2017/0435) and Pemberstone Reversions v Various Leaseholders of Cypress Apartments and Vallea Court (MAN/00BR/LSC/2018/0016). In both cases, the landlord succeeded in persuading the Tribunal that the costs were recoverable.

There is also E&J Ground Rents v Various Leaseholders of Fresh Apartments (MAN/00BR/LSC/2017/0068), which dealt with the costs associated with a waking watch.

None of those decisions set a legal precedent, as the FTT is not a court of record; however, they are an interesting indication of prevailing judicial opinion.

Another interesting feature of those decisions, is the landlord’s reliance on its covenant to insure, and its insurers requirement that any combustible cladding be removed and replaced, allowing the landlord to recover the cost as part of the cost of insuring the premises.

Government Funding Proposal

In May 2019, the Government has announced that around £200 million will be made available to remove and replace unsafe cladding from around 170 privately owned high-rise buildings, which exceed 18 meters in height. Full funding guidance was published in July 2019.

Applications will have to meet certain criteria to access funding and the Department for Communities and Local Government will make final decisions. There is likely to be a time limit on applications once the fund has opened.

The “responsible entity” will be responsible for making the application. A “responsible entity” is any entity with a legal obligation to carry out the works and the legal right to recover funds (ordinarily) from the leaseholders.

As a condition of funding, the Government will stipulate that the building owner “responsible entities” pursue warranty claims and legal action against those responsible for putting unsafe cladding on these buildings with sums recovered to be paid to Government.

There will also be an obligation to keep leaseholders informed at various stages of the process (submission of the application, outcome of the application, commencement of the work and completion of the work); and to inform leaseholders that they can obtain specialist advice from LEASE.

The following issues arise:

  1. The proposal (in its present form) is not legally binding.
  2. It would appear that the fund will be limited to the costs associated with the removal of combustible ACM cladding and its replacement of with materials of limited combustibility that have been classified as European Class A1 or A2-s1,D0. Other types of cladding (e.g. HPO) and other fire safety issues are not considered; nor interim fire safety measures such as the installation of fire alarms or the employment of a “waking watch” (the cost of which can be substantial).
  3. The funding guidance sets out what costs, specifically, will be covered by the fund. Any costs which fall outside the scope of the funding will have to be met by the responsible entity (and possibly, ultimately, paid for by leaseholders).
  4. It would be surprising if £200m is sufficient. The author is aware of some works, the cost of which is likely to exceed £10m.
  5. What steps will the “building owner” be required to take to recover the costs; and when would it not be “reasonable” for the building owner to take action against those responsible? When the prospects of success are 60%? 50%? 40%? Nil? If the building owner is the developer, are they considered to be an entity who is responsible for the unsafe cladding? What happens where the “responsible entity” is a management company, which cannot control the actions of the building owner?

Conclusion

If you manage or live in a block with ACM cladding (category 2 or 3), if you have not already done so, you should seek independent, specialist legal advice on your ability to recover, or liability to contribute towards, cladding costs. If you are not able to reach an agreement, the matter can be referred to the First-tier Tribunal (Property Chamber), who can make a determination under s.27A of the Landlord and Tenant Act 1985.

 

If you have any questions about this topic, Roger Hardwick, Partner in the Residential Leasehold department at Brethertons will be happy to help.

01295 661453 | rogerhardwick@brethertons.co.uk