Building safety charges – the biggest reform to service charge legislation in 20 years – are on their way. Douglas Rhodes and Scott Dorling explain what you need to know.
The draft Building Safety Bill was published by the government in July 2020. It represents the largest step taken so far towards implementing the Hackitt Review, which was carried out following the Grenfell Tower fire in 2017 and made wide-ranging recommendations to improve the fire safety of high-rise residential buildings.
Alongside the many expected measures contained within the draft bill, there was one unexpected but very significant area of reform included in relation to service charges and the issue of who will be liable to pay for the very substantial cost of the building safety reforms.
What does the draft bill do?
The draft bill covers all buildings with an enhanced regime (including the proposed new measures in relation to service charges) applying to higher-risk residential buildings – any building of at least 18 metres or more than six storeys above ground level, containing two or more dwellings.
The draft bill will place substantial obligations on the newly created statutory role of the “accountable person”, who will be the person (or persons) responsible for repairing the common parts of any higher-risk building. The accountable person will be responsible for assessing building safety risks, appointing a building safety manager (which is a “super caretaker” role), preparing and registering a building safety case with the Building Safety Regulator, mandatory incident reporting and preparing and implementing a resident engagement strategy.
Inevitably, there will be a significant cost associated with the new obligations. The draft bill deals with this issue by imposing new implied covenants on landlords and tenants of long leases of residential dwellings, and by introducing a new category of service charges called building safety charges. These will apply to existing buildings and new builds.
The new building safety charges
Building safety charges are defined by the draft bill as the costs to be incurred by or on behalf of an accountable person in connection with carrying out prescribed building safety measures. It sets out the following obligations on landlords:
- A building safety budget will need to be served before building safety charges can be demanded. This will be distinct from existing service charge budgets. n If additional costs are incurred, an additional budget will need to be served before tenants can be required to pay additional charges (although demands cannot be served more than once every three months).
- Sums received from tenants towards building safety charges will need to be held in a designated trust account.
- A reconciliation account will need to be served within 28 days of the end of the relevant service charge accounting period, specifying what measures were carried out, what costs were incurred (and not incurred), the total amount of building safety charges due, the total received, and the total remaining in the designated account. This includes actual receipts as well as the sums demanded. n New consultation requirements are being introduced. These will be similar to existing section 20 requirements, including the ability to apply to a First-tier Tribunal for dispensation. However, differences include an urgent works procedure that will exempt a landlord from the need to consult when the works are required pursuant to a compliance notice or urgent action notice issued by the Building Safety Regulator.
- The requirement of reasonableness will apply to building safety charges in the same way as for existing service charges, including the ability to apply to a First-tier Tribunal for a determination as to the reasonableness of the charges.
Implied terms in leases
The draft bill also introduces new implied terms into long residential leases of higher-risk buildings. For landlords, the new implied covenants require the landlord (if it is an accountable person) to carry out prescribed building safety measures in relation to the building, co-operate with any other accountable persons, comply with the building safety charge regulatory obligations, and take all reasonable steps to apply for any relevant financial support available to cover costs of prescribed building safety measures.
For tenants, there are equally important new implied covenants, namely to pay building safety charges within 28 days of a demand, to provide access to the landlord for inspections in relation to safety measures or for carrying them out, and to comply with the new residents’ duties relating to building safety.
A parallel world
The bill is still in draft form and may yet change before it is enacted. However, it is expected to come into force in autumn 2021, so landlords will need to familiarise themselves with the proposals ahead of implementation and raise any practical issues during the scrutiny process.
Certain aspects of the draft bill will be welcomed by landlords, particularly the implied covenant in leases for tenants to pay building safety charges. However, these will create additional regulatory burdens on landlords, essentially requiring parallel budgets and service charge accounts to be kept, one for building safety charges and one for conventional service charges. This will create traps for the unwary, which could leave landlords picking up the bill for fire safety costs, or alternatively relying on a dispensation application to the First-tier Tribunal in order to recover the sums from leaseholders.
Landlords should also keep an eye on work being undertaken by Michael Wade, who the government has appointed to come up with funding solutions to protect leaseholders from the costs of fixing historic defects, while ensuring that the burden does not fall on tax payers.
Given the potentially short transition period, with some commentators saying existing buildings may need to be brought up to standard within 12-24 months of the passing of the legislation, there is likely to be a very short timeframe to get to grips with the building safety provisions before some potentially very significant fire safety works will be required in order to successfully register existing buildings with the new Building Safety Regulator.
Douglas Rhodes and Scott Dorling are partners at Trowers & Hamlins
