Camilla Waszek of specialist property solicitors JB Leitch reflects on 2022 and the impacts of new safety legislation on service charge recovery…
It could be something of an understatement to say that 2022 has proven to be a memorable year.
From the continuing tragedy in Ukraine to the loss of Her Majesty the Queen, to parliamentary upheaval and economic uncertainty, the last twelve months have proved to be a trying time for society.
Across the property management sector we have also seen significant change that brings significant and long-term impacts to landlords, managing agents and leaseholders. The introduction of the Leasehold Reform (Ground Rent) Act 2022 and Building Safety Act 2022 (BSA) this year stand out as key legislative instruments that bring new duties, responsibilities and potential penalties for non-compliance. The BSA in particular has been a source of continued debate, scrutiny and even confusion, with the next 18 months set to introduce a raft of secondary legislation to flesh out the details, definitions and new processes further.
In this article we provide an overview of some of the key points to consider from the BSA in relation to service charge recovery and, specifically, when service charge is not payable due to the BSA.
It is clear that the purposes of the BSA, and in particular Schedule 8, is to seek to limit the costs payable by leaseholders, and particularly qualifying leaseholders, in respect of contributing towards the cost of works to remedy “relevant defects”. There are many issues that require clarification by way of further Regulations and Court guidance, but a question arising is; when is service charge not payable due to the BSA?
Limitations on recovery
There are various limitations provided under the BSA, which are summarised below; the below presumes that the developer has not agreed to fund the works.
They restrictions are set out below in order of most stringent restrictions on recovery. Where the condition in the more stringent restriction is satisfied, there is limited need for the landlord to consider the subsequent restrictions.
Protections for all leaseholders:
Where the landlord or associate is responsible for the defect:
Where the defect is an initial defect, a landlord (or associate) is responsible for the works if they were the developer or undertook or commissioned the works relating to the defect (or was in a joint venture with that person). In any other case, a landlord is responsible for the relevant defect, if they undertook or commissioned those works.
In either circumstance, no service charge is payable under the lease; as this paragraph doesn’t refer to a “qualifying” lease, then it is anticipated that it is intended to refer to all leases in the premises (i.e., including “non-qualifying leases” and commercial units).
Protections only for qualifying leaseholders:
For each of those matters which only affords protection to qualifying leaseholders, the below presumed that the landlord is not responsible for the relevant defect.
A lease is a “qualifying lease” if it is (a) a long lease of a dwelling in a relevant building (b) the tenant is liable to pay a service charge (c) the lease was granted before 14th of February 2022 and (d) at the beginning of 14th of February 2022, the dwelling was the tenant’s only or principal home, they did not own any other dwelling in the UK, or they owned no more than two dwellings in the UK apart from their interest under the lease.
Leases of dwellings are presumed to be a “qualifying lease” until such time as the presumption is displaced, either via the leaseholder providing a leaseholder deed of certificate confirming that none of the conditions summarised above were met, or by failing to respond to the request for the provision of the leaseholder deed.
The below restrictions only apply to a qualifying lease (i.e. the protections don’t apply to non-qualifying leases of dwellings and non-dwelling units).
Cladding remediation
- No service charge is payable under a qualifying lease in respect of cladding remediation. This means the removal or replacement of any part of a cladding system that forms the outer wall of an external wall system and is unsafe.
Works in respect of non-cladding remediation
- Where the landlord meets the contribution condition:
- Where, at 14 February 2022, a landlord group’s net worth was more than N x £2,000,000 (where N is the number of relevant buildings for which a member of the landlord group was a landlord under a lease of the relevant building), no service charge is payable under a qualifying lease in respect of a relevant measure relating to any relevant defect.
Low value leases/permitted maximum
- Where a lease value is considered to be of a low (i.e. £325,000 in Greater London, or £175,000 in any other case), no service charge is payable under a qualifying lease in respect of a relevant measures relating to any relevant defects.
- For all other qualifying leases, the recovery of relevant service charges is limited by a permitted maximum and annual limitation. Details on how that is calculated is set out in paragraph 5-7 of Schedule 8 of the BSA: Building Safety Act 2022 (legislation.gov.uk)
Other Considerations
Legal or Professional services relating to liability
No service charge is payable under a qualifying lease in respect of legal or professional services relating to the liability (or potential liability) of any person incurred as a result of a relevant defect. This limitation doesn’t incorporate fees for legal or professional services relating to other issues beyond that of liability.
Presumptions relating to landlords
Under paragraph 14, and by virtue of regulation 6(7) of The Building Safety (Leaseholder Protections) (England) Regulations 2022, where a relevant landlord fails to provide a landlord’s certificate in accordance with the Regulations, a landlord is treated as having met the condition in paragraph 2(2) of Schedule 8 of the BSA; namely they are treated as being responsible for the relevant defect. Therefore, a landlord cannot recover the costs from any leaseholder. It is therefore imperative that, where a landlord is required to give a certificate, they should use all best endeavours to ensure that the landlord’s certificate is provided within the requisite timescales. If a landlord cannot fully comply, then it should give a certificate with all information that it is able to provide, explaining what information is not included and why it has been unable to provide that information (such as requiring information from third parties, including the leaseholder).
In Summary
The Building Safety Act 2022 is legislation which, subject to supplementary statute and being tested in the courts, leaves many issues subject to further clarification.
As a final note, given that title structures for different developments vary in complexity, it important understand that the definition of a relevant landlord for the purposes of the Act can be an under leaseholder, a head lessor, and/or a superior landlord such as a freeholder. It is therefore important to note that the current landlord will not always be the relevant landlord. Relevant landlords who are not themselves responsible for the defect, connected to the responsible party (i.e. in joint venture) or do not meet the contribution condition ought to consider whether this applies to any superior landlords.
If so, then the protections under paragraphs 2 and 3 of Schedule 8 of the Building Safety Act 2022 may be triggered and a landlord must look at avenues for recovery other than the service charge such as recovery from such superior landlords.
A current landlord – who is not the relevant landlord – should consider recovery of service charges from relevant or superior landlords where applicable.
Should you wish to discuss service charge recovery and the impacts of the Building Safety Act, please contact us: [email protected]
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