Since the building safety crisis began, the main focus from a service charge perspective has been whether landlords can (and should) recover the cost of remediation works from leaseholders.
However, with the October deadline for registration of higher-risk buildings looming, many landlords are already incurring costs in the preparation of building safety case reports and resident engagement strategies, which poses a different question: can these costs of compliance be recovered as a service charge? The good news for landlords is that the answer to this question is a qualified “yes”.
New obligations, new lease terms
Part 4 of the Building Safety Act 2022 imposes significant regulatory obligations on the accountable persons of a higher-risk building (meaning a building of at least 18m height or having at least seven storeys and containing at least two residential units).
Those obligations include primarily:
- applying for registration of the higher-risk building with the Building Safety Regulator;
- assessing building safety risks and preparing a safety case report;
- establishing and operating a mandatory occurrence reporting system; and
- preparing a residents’ engagement strategy.
There are more limited corresponding obligations placed on residents not to act in such a way as to create a significant risk of a building safety risk materialising, not to interfere with safety items (firefighting equipment) and to provide access to an accountable person where required for the performance of their duties.
In order to underpin these obligations, which apply to existing buildings as well as to new ones, section 112 of the Building Safety Act 2022 introduces implied terms in long leases (of more than seven years) of dwellings within higher-risk buildings, placing new obligations on landlords and tenants alike. The broad purpose of the implied terms is to ensure that there is a contractual provision in the lease that requires both landlords (where they are the accountable person) and tenants to comply with their new building safety duties.
Section 112 also provides for the recovery of these costs where the long lease contains a variable service charge. Such leases have effect as though the cost of taking building safety measures – which include most of the new measures required to be undertaken by accountable persons under Part 4 of the Act – is a recoverable head of service charge. As to apportioning the costs, if there is more than one method of apportionment in the lease then the costs are to be apportioned in the same way as insurance costs.
There are certain notable exceptions to these recoverable building safety costs, such as the cost of works to the building, any penalty imposed by the regulator, or costs incurred by reason of negligence or breach of contract. The government has also recently consulted on introducing transparency requirements on landlords, which could require building safety costs to be separately identified in service charge demands and annual year-end accounts. These additional transparency requirements are due to be set out in further regulations, or may form part of the much anticipated forthcoming leasehold reform legislation.
It is a service charge, after all
For landlords who are the principal accountable person of higher-risk buildings and are already incurring compliance costs, it is helpful that the Act confirms the recoverability of compliance costs. However, landlords should note that the effect of the Act is limited to ensuring that the lease shall be read as though the costs are recoverable under the terms of the lease.
As the costs will still constitute a service charge, the following considerations apply:
- Section 20 consultation will need to be undertaken if the landlord enters into a qualifying long-term agreement (for a term of more than 12 months) with a service provider under which the leaseholder will be required to pay more than £100 per year per property.
- Leaseholders will retain the ability to challenge the reasonableness of the costs incurred by way of application to the First-tier Tribunal (Property Chamber) in the same way as any other service charge, meaning that value for money should be demonstrably obtained when costs are incurred.
- In anticipation of the likely additional transparency requirements, landlords should ensure that building safety compliance costs are accounted for in such a way to enable them to be separately identified. Particular consideration will need to be given where employees (or contractors) of the landlord are carrying out the building safety measures across multiple buildings.
Radical reforms
In one fell swoop, the Act has introduced new provisions into every long lease of a flat in a higher-risk building in the country. Given the estimated 12,500 higher-risk buildings due to be registered, this is likely to amount to hundreds of thousands of leases having been amended overnight. The effect is to impose obligations on landlords and tenants alike to ensure both that there is compliance with the new regulatory regime, and that leaseholders contribute towards the costs of such compliance.
Given the wide range of approaches being taken by landlords of higher-risk buildings to their building safety duties, it remains to be seen how a First-tier Tribunal will deal with future challenges to the recovery of building safety compliance costs.
However, over the coming months and years, it is likely that the tribunals and courts will start to see a range of challenges based on this new and wide-ranging legislation, ranging from service charge disputes to access enforcement orders to enable accountable persons to carry out their duties.
Douglas Rhodes is a partner in the property litigation team at Trowers & Hamlins LLP
