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The cost of fire safety works in high rise blocks

A Parliamentary Briefing Paper was recently published on 16 June 2020 entitled Leasehold high rise blocks: who pays for fire safety work? The full article can be found here - we have picked out some of the main points below.

As at 31 May 2020, 455 residential blocks and public buildings over 18 metres in England had been identified as having Aluminium Composite Material (ACM) cladding installed or previously installed - so that is the same or similar type cladding to that applied to Grenfell Tower. Of the 455 identified blocks, 300 were yet to be remediated. And 154 of the affected buildings are social housing blocks owned/managed by a local authority or housing association.

Remediation work is complex, and the associated costs are significant. The question of who is responsible for paying for remedial works has been at the forefront of debates.

On 16 May 2018, the Government announced that it would meet the reasonable cost of the removal and replacement of unsafe cladding by councils and housing associations, estimated at £400 million. The funding only covers the removal and replacement of unsafe cladding but the government did say it would continue to provide financial flexibilities for other essential fire safety measures. At 31 May 2020, the Social Sector ACM Cladding Remediation Fund had approved £270 million for the removal and replacement of unsafe ACM.

In the March 2020 Budget, the Government announced that it would provide £1 billion over the next year "to support the remediation of unsafe non-ACM cladding systems on residential buildings over 18 metres in both the private and social housing sectors." This is in addition to the £600 million of funding for ACM cladding. However, in order to access funding, social landlords must establish that they "are unable to pay" and provide a business case setting out its financial position and options. The Regulator of Social Housing must also be notified.

There are significant ongoing concerns regarding the funding, including the adequacy of funding, certain exclusions, and the impact on leaseholders who face rising costs and are unable to sell or re-mortgage their homes.

The Fire Safety Bill 2019-21 was introduced in the House of Commons on 19 March 2020. The Bill is intended to "Put beyond doubt that the Fire Safety Order will require building owners and managers of multi-occupied residential premises of any height to fully consider and mitigate the risks of any external wall systems and fire doors."

The prioritisation and cost of fire safety work in the absence of additional funding is likely to have an impact on other areas of social landlords' activities, including investment in new affordable housing development and capital investment in improving the housing stock. It would also put an upward pressure on social rents.

Service Charges

When major works are carried out on blocks owned by social landlords there is usually no additional cost to be met by secure and assured tenants, as such works typically fall with the landlord's statutory repairing covenant.

Long leaseholders in these blocks could be liable to pay a contribution towards the cost of the works depending on the wording of their leases; and this can result in individuals facing some substantial bills.

In the aftermath of Grenfell, the Government made repeated references to a commitment by social landlords not to recover the cost of remedial works associated with cladding safety from long leaseholders. David Orr, then CEO of the National Housing Federation, responded saying "As freeholders of leasehold properties, our members have legal responsibilities as part of their leases and are therefore legally entitled to recoup the reasonable costs through service charges." It seems that the Government had taken the liberty of making the commitment on social landlords' behalf without having checked with them first!

Some social and public sector landlords have sought to recover a proportion of the cost of associated fire safety works from their long leaseholders. For example, the London Borough of Wandsworth (LBW) resolved to retrofit sprinklers in all its blocks of 10 storeys or higher and obtained legal advice that the cost, estimated to be around £3,000 to £4,000 per unit, would be recoverable. LBW resolved to refer the decision to recharge long leaseholders to a First-Tier Tribunal (FTT) following concerns raised by leaseholders. Leaseholders applied to strike out the case and on 18 December 2019, the Tribunal upheld the leaseholders' application. The Tribunal found that LBW was not entitled to ask for a blanket determination and said that if the council wished to proceed it would have to consider each block of flats individually - something of an unhelpfully onerous task, it has to be said.

There has been limited reference to the potential for authorities to be challenged for breach of their fiduciary duty where no attempt is made to recover contributions from long leaseholders if the leases in question allow for this. During a Westminster Hall debate on fire safety and cladding on 6 March 2018, Andy Slaughter MP made the point that not charging leaseholders in social housing blocks for fire safety works meant that "ultimately the money for them will come from tenants." This is less of an issue in light of the Government's decision to fund certain remedial works in the social housing sector (assuming landlords want to dip into the fund), but is still an interesting point and relevant to cost of other fire safety works.

The Government has said that building owners should also explore every opportunity to fund cladding work via those originally responsible for the defects and warranty claims before seeking Government funding or passing on costs to leaseholders. As it's predicted that the Government fund is not large enough to cover the total remediation costs for all affected blocks, which is estimated to be as much as £3.5 billion, these are options which must be considered. Also, the fund won't cover affected blocks under 18 metres tall. So, there is a real likelihood that landlords will turn to their leaseholders to recover remediation costs.

Moreover, the fund is exclusively for the removal and replacement of cladding. If the Government were to fund remediation costs for all fire safety defects, it could cost up to a staggering £15 billion. In addition, insurance premiums for affected buildings are likely to have risen substantially which will impact on service charges payable by leaseholders.

Forbes Comment

From speaking with housing associations, we understand there is generally a feeling of apprehension in applying for funding. As notification to the Regulator is required, we understand there is a fear of being downgraded due to concerns that an application for funding might be interpreted as an admission of financial non-viability. It appears to us that social landlords are also not keen to pass the cost of fire safety works onto leaseholders, which will result in landlords picking up a hefty bill and questioning where the money will come from. If that weren't enough, the financial devastation left by the Coronavirus pandemic is likely to exacerbate the existing paralysis of fear, with the risk that the can will continue to be kicked down the road. In the meantime, it is the ordinary tenants and leaseholders who are left suffering, often in flats which are unsellable and/or un-mortgageable.

The government appears to be guilty of announcing a headline-grabbing financial package to deflect attention and criticism, but which appears to come with so many strings attached, particularly for unsafe non-ACM cladding, that it can be confident that the money will not all be used and can be recycled into other projects in future. MCHLG could possibly break the deadlock by at least altering the funding eligibility to clarify that it is available if a social landlord can demonstrate that there is no contractor, developer, insurer or superior landlord who can be viably claimed against, and the application is therefore made in order to avoid leaseholders having to pay. Otherwise, in the absence of a clear "no strings" funding commitment, the debate is likely to continue for some time to come - along with the risk of another Grenfell.

For more information contact Emily Jordan in our Insurance department via email or phone on 0333 207 1130. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

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