The property management industry is now all too aware of the devastating consequences of a building which is not fire-safe, particularly where, as has been alleged following the Grenfell Tower tragedy, the cause was defective cladding.
Most landlords of blocks which use the same cladding are keen to replace or modernise aspects of the buildings to prevent, insofar as is possible, further disaster.
Where a building is identified as needing remedial works to rectify any fire concerns, but at the same time the cladding complies with current building regulations, how is a landlord to ensure the safety of his tenants without being out of pocket?
Is the Service Charge the answer?
Service charge obligations within a lease often start with a landlord (or management company) being required to repair the building, the costs of which are then recoverable from the leaseholders as a service charge. The issue however is that, for a repairing obligation to “strike”, the building must be in disrepair, that being a state worse than its previous condition.
If the fire-safety elements of a building are not in disrepair, despite their being unsafe, it follows that the repairing obligation is not triggered and as a result, leaseholders are not obliged to contribute towards the cost.
In large blocks this clearly creates a problem for landlords, so what are the solutions?
Does the lease allow for improvements?
Many local authority leases and some (albeit not many) private leases contain provision for the landlord to undertake improvement work and to recover its costs. However even if improvement works are permitted under the lease, s.19 of the Landlord and Tenant Act 1985 relating to reasonableness still applies. Decisions to make the improvements and incur the cost must be reasonable. If fire-safety works are undertaken as an improvement, it will be interesting to see whether firstly, any leaseholders challenge this at a tribunal and secondly, how a tribunal will react given that in most cases, the cladding is compliant with current building regulations.
Works are likely to be considered reasonable if there is a genuine concern for safety and the cost per tenant is not too high. Thought should however be given to offering generous payment terms if finances allow.
Sweeper Clauses?
Many leases contain sweeper clauses to the effect that the landlord can undertake additional services in the interests of good management, or similar. The problem with such clauses is that, though they appear all encompassing, the courts do not tend to interpret them as such.
The case law surrounding sweeper clauses is beyond the scope of this article, however the broader the drafting, the more chance of recovering costs. A court or tribunal will interpret the clause by reference to the principles established in Arnold v Britton & Ors [2015] UKSC 36 including the lease as a whole; the overall purpose of the clause and the context when the lease was entered into; amongst other considerations.
If you wish to rely on a sweeper clause, again ensure that the decision and cost to replace is reasonable.
Lease Variation?
If you’re fairly certain that you’ll be unable to recover charges, you may consider applying to a tribunal for a lease variation. Section 35 of the Landlord and Tenant Act 1987 sets out the grounds on which a variation of leases can be applied for. The most applicable one here would be that the lease fails to make satisfactory provision for the repair or maintenance of the building. The trouble is, assuming the lease is in a reasonable form and contains usual repair and maintenance covenants, it is difficult to see how a tribunal could determine that a lease “fails to make satisfactory provision” in that respect. You can of course agree a variation under Section 35 with the requisite consents but this does not guarantee you a variation, the tribunal does not always order a variation simply because consent is obtained. Voluntary variation is another option but many leaseholders feel aggrieved at having to pay out to guarantee their safety so this option is probably unrealistic, save perhaps for where the freehold is owned by leaseholders and relationships are good.
Recovery through Articles of Association?
Sometimes, particularly in the case of a RMC or leaseholder-owned freehold, the articles of association of the company might allow for exceptional costs to be paid by the members. As with a lease, the Articles are a contract and cannot be used to recover costs which are not permitted.
Reserve Funds?
You are aware that you cannot use existing reserves to pay for matters which you did not collect them for. If however your leases allow for a reserve fund, anticipated fire safety works should be budgeted and collected over the next couple of years. If building regulations change or the materials fall into disrepair, costs are going to be easier to recover so it would be useful if funds were in place to begin work straight away.
What are your Alternatives?
If a full cladding replacement is likely to be necessary, but finances do not allow (whether via your own finances or simply because recovery is not an option) there may be other alternatives available. Speak to specialist fire consultants as each block will be different but some of the ideas emerging are; improved alarm systems; additional sprinklers, or hiring watchmen. These are not long term solutions but could bridge a gap whilst finances are sought (or until existing cladding falls into disrepair). Again, it is anticipated that given there are safety issues, a tribunal will give more weight to safety as a motivation for works which might assist landlords in arguing reasonableness.
In Summary
Leases come in various forms so the terms are always the starting point. If remedial works are required to protect your leaseholders ensure decisions made are reasonable, along with the costs. Alternatively, consider bridging works but engage specialist fire consultants throughout.
Sarah Goodall, Solicitor at Bolt Burdon
