Replacing cladding and service charges – who bears the cost?

In the wake of the Grenfell disaster, recommendations have been made to re-assess external cladding on high rise buildings to ascertain whether the cladding complies with the Government’s new fire safety regulations. As touched on in previous blogs by our Insurance Litigation team, improved cladding has become the subject of political and moral debate particularly over whether the tenants or landlords should be responsible for the cost of repairs. With case law confirming liability is dictated by the provisions within the lease, it is important for both sides to understand what they should be looking out for when trying to understand their rights.

What is the service charge?

A service charge is an amount that is payable (by the tenant to the landlord) either as part of or in addition to the rent.  Among other things, it covers costs incurred by the landlord in complying with its obligations under the lease to provide services, repairs, maintenance, improvements and insurance.  In undertaking any works the landlord must behave reasonably.  The amount a landlord can recover from its tenants is limited to covering only the cost of works that it was reasonable for the landlord to undertake and that are completed to a reasonable standard.  A tenant can challenge a service charge that it considers is unreasonable.  Within a lease of residential premises, service charge obligations usually require the landlord to repair the exterior, structure and common parts of the building, the costs of which are recoverable from the leaseholders.

Landlords beware

It is essential that all landlords carry out thorough risk assessments of any building with external cladding and at the same time consider their obligations in terms of repair and right to recover a contribution to the costs from the tenant.

In Cypress Place and Vallea Court, Manchester –v- Pemberstone Reversions, the landlord, Pemberstone, acquired the freeholds to two blocks of flats in Manchester which contained over 300 flats.  The blocks were covered in cladding but failed to meet fire safety regulations imposed after Grenfell.  Pemberstone added a £3million cost of replacing the cladding to the leaseholders’ annual service charge, meaning each flat owner had a bill of £10,000.  Included in this was a “waking watch” charge, for 24 hour security in case there was a fire before the dangerous cladding was replaced.

Following raising a fighting fund through crowdfunding, the leaseholders challenged Pemberstone’s entitlement to recovery and the amount claimed in the First-tier Tribunal (FTT).  The challenge included the fact that the monies were neither reasonable nor recoverable pursuant to section 19 of the Landlord & Tenant Act 1985.

The FTT determined that both the interim fire safety measures (including the “waking watch”) and the costs of replacing the cladding were service charge items and therefore recoverable as a matter of contractual right by the landlord from the lessees.  Specifically, the FTT looked at four types of lease provision, namely those that:-

1. Dealt with compliance by the landlord with covenants relating to the structural aspects of the building;
2. Allowed the landlord to recover the cost of works for services that the landlord considered necessary for the sake of good estate management;
3. Allowed the landlord to recover the cost of works for the general benefit of the apartments in the block; and
4. Required the landlord to comply with statutory and fire safety requirements.

If the lease states that the landlord had retained ownership of the property’s common areas, including its exterior, structure and external parts then, if the replacement cladding falls within the definition of repair or maintenance of the building, the landlord will have a responsibility to replace any cladding on the exterior that is deemed a fire risk.  If a landlord chooses not to act, then it could be found liable to the tenants and their visitors in the event a fire should occur.

Tenants

Nevertheless, tenants should also look carefully at the provisions of their leases to see if they are obliged to contribute to the costs of any works the landlord carries out.

For tenants who are long leasehold owners within these high rise buildings, if the work comes within the definition of the services the landlord is obliged to provide then they are likely to be required to contribute to the cost of the works through the service charge.  As such, it is important for tenants to be aware of the terms of their leases and the extent to which landlords are able to charge for repairs.

In Waaler –v- Hounslow LBC (2017) the tenant was the owner of a flat on an estate owned by the landlord.  The lease obliged the tenant to pay a service charge in respect of repairs carried out by the landlord and to contribute a proportion of the cost of any improvement works.

The landlord served notice on the tenant of its intention to carry out major works.  This included replacing the roof, wooden-framed windows with metal ones, removing asbestos and also external cladding.  The tenant’s contribution to the cost of works was estimated to be £62,134.01.  The particular landlord proceeded with the works and the tenant received a service charge demand for £55,195.95.  The tenant then applied to the FTT to determine what contribution was reasonable.

The FTT considered the correct approach to determining service charge costs had been “reasonably incurred”.  Whilst in this case the lease imposed a duty on the tenant to contribute to the cost of improvements carried out by her landlord, under her lease the landlord did not have an obligation to carry out these particular improvements.

As a result, the Tribunal did not agree that the cost of improvements were recoverable under the terms of the lease and also found that repairs and improvements should be treated differently.

In respect of repairs, the landlord was obliged to carry out the repairs in accordance with the terms of the lease and therefore the landlord had no choice.  Further, given the landlord had no option and had to carry out repairs, the Tribunal decided that the landlord had a right to choose how to discharge its obligations.  The only requirement was for the landlord to act reasonably.

However, in relation to improvements, the Tribunal decided that different considerations should apply, because the terms of the lease meant that the landlord could choose whether or not to carry out improvements.

It was decided that where the costs of the works was high, and a result of those works was a building which was wholly different from the original building, then the landlord must consider two factors before proceeding with any improvement:-

• The availability of an alternative and less expensive remedy;
• The views and the financial needs of the tenants who will be required to pay for the works.

Lessons for both landlords and tenants

It is important for tenants to be aware of their rights under the Landlord & Tenant Act 1985, specifically those protecting them from excessive service charges.

Tenants should always consider whether a landlord is able to recover the cost of repairs/improvements; the extent to which the landlord is able to do so will always depend on the terms of each lease.  Caution should be taken because many new leases provide landlords with a wide discretion to undertake improvement works and to recover the costs.  In that situation, tenants should concentrate on putting in place financial measures to ensure they can provide their due contribution.  It is also worth bearing in mind that these sorts of improvements will have an impact on the value of each tenant’s property.  Apart from the obvious safety concerns, defective cladding is likely to result in a substantial diminution in value of their property and is also within the interests of the leaseholders for these works to be carried out.

There is no clear definition of what is reasonable and each individual situation must be considered on its facts.  The starting point will always be the terms of the lease.  If there is no clause in the lease requiring the tenant to pay service charges (which would be a very unusual clause) then none would be payable.  If the lease does provide for payment of a service charge, then consideration must be given to the specific wording, as what is covered is not always clear and disputes often arise.

A prudent landlord should consult with residential leaseholders before carrying out any works above a certain value or before entering into any long term agreement for the provision of services.  Ultimately, when urgent works are required it is within the interest of landlords and tenants to work together to find a solution, rather than waste time and energy locked in dispute.

We are able to advise freeholders and leaseholders regarding their rights and/or obligations and how best to proceed.

For further information regarding this topic or any other property litigation matters please contact any member of the Edwin Coe Property Litigation team.

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