Note: The Tribunal has now [March 2018] ruled against the leaseholders; report here.
The first battle in the tortuous struggle over who pays what for post-Grenfell tower block cladding has shown how complex this issue is going to be – but also offered some clues as to how the battle lines will be drawn up. One of the leaseholders of the Citiscape blocks in Croydon, south London, made a compelling submission to the Property Tribunal in London to explain why leaseholders should not have to pay for replacing allegedly dangerous cladding.
New government regulations require blocks to be stripped of cladding of the sort assumed to have been the cause of the Grenfell Tower fire tragedy in Kensington, west London, last year.
The issue of who pays will come down, not to who has the most money – freeholders or leaseholders – nor to the “moral case” according to Sajid Javid, Secretary of State for Housing (that “the tab should be picked up by the freeholders of those properties”). It will come down to interpretation of the leases between freeholders, who own the land (and hence are paid annual ground rents), and leaseholders who have bought flats in the blocks up and down the country (and hence have to pay the annual service charges for work on the buildings and administration).
The flats are bought on leasehold which means they revert back to the freeholder after a term of years – in the Citiscape case 999 years in total (they were built in 2004). This period is deemed “almost freehold” (ie almost as if the leaseholders owned outright), and that fact may have a bearing on the eventual outcome of the case. Note also that not all leases are the same, so the Citiscape case may give clues for other cases (of which there are likely to be many) but won’t be a precedent.
But first to Mr Terry Ede, no lawyer but a leaseholder who was able eloquently to put the legal case at the tribunal for why he (and potentially the other leaseholders) should not have to pay for replacing cladding now deemed unsafe by the Government.
He told the tribunal panel headed by the judge Angus Andrew that leaseholders acknowledged they should pay through service charges for “maintenance” of the fabric of the building but “maintenance” only related to areas of damage or deterioration. The lease (which is a contract between freeholder and leaseholders) made reference to this very clearly (in the Part A schedule to the lease).
But a separate section (Part D) suggested work on “inherent building faults” was not payable by leaseholders, according to Mr Ede. Instead FirstPort Property Services, the management company responsible for maintenance and refurbishment (but not generally for paying for them – as per Part A), must be responsible for the work and then for chasing whoever it is necessary to get the money from.
Mr Ede suggested they should perhaps go knocking on the door of the original developer, Barratt, though the freeholder might be a possibility too. The freehold is held by Proxima GR Properties, a company ultimately owned by the conveniently wealthy Tchenguiz family trust of which property tycoon Vincent Tchenguiz is a beneficiary.
The management group’s dilemma
In many leasehold blocks the freeholder also manages the buildings, doing the maintenance and refurbishment and billing the leaseholders. In other cases, as here, the freeholder is very much hands off, collecting the ground rents but handing management to a separate company such as FirstPort, whose services are paid for by the leaseholders. FirstPort looks after 3,700 properties amounting to 185,000 homes but does not own the freehold of any of them. The tribunal heard that FirstPort had indeed gone knocking on Proxima’s and Barratt’s doors but “both have declined to make a contribution”.
Paul Atkinson, FirstPort’s regional director, in his evidence, gave something of an impression of being at his wit’s end about getting money from someone for the work. His job is made immeasurably more difficult because of an initial underestimate of how much the work will cost. This was £485,000. The real cost is likely to be £2m. The original estimate “looks like something done rather on the hoof” said the leaseholders’ lawyer Amanda Gourlay. Mr Atkinson explained: “We needed to put something in the budget and asked the chartered surveyor to give a view and had to rely on that.”
But it’s worse. The management company can only ask leaseholders for money twice in a year. It has asked for the lower figure (the subject of the tribunal case – sufficient only to remove, not replace, the cladding), and the window for asking for more doesn’t open again until September. And worse still, FirstPort finds it can’t borrow money to do the work up-front and charge the leaseholders later. Banks won’t lend it to them, though they would lend to individual leaseholders (presumably on the grounds that they are the people who actually hold the value of the property in their hands – albeit the flats are near unsaleable until all this is sorted out).
So FirstPort needs the whole £2m before it can get to work. Since it’s stymied by the lease, the leaseholders can hold back from paying and so the work can’t be done until some time in 2019 – a lost year, according to Ms Gourlay.
“We are seeking clarity from government on possible support for leaseholders, but funding is required,” Mr Atkinson said. The longer the cladding remained in place, the more problematic. This is because fire marshals or are on site 24/7 perambulating the two blocks in 20 minute cycles at a cost of £4,000 a week (though a couple had been spotted sleeping on shift, according to evidence at the tribunal).
FirstPort had “encouraged” the Croydon MP to talk to the government about coming up with money and was itself part of a lobby group to try to get public money. “But it’s a very difficult situation.” Indeed.
There was insufficient time for full submissions from the lawyers on each side (they’ll be winging their way to the panel within the week). But Ms Gourlay was happy to adopt much of Mr Ede’s position.
Mr Ede considered it unrealistic to think that the leaseholders could have known about the cladding. He himself bought off-plan and in fact his cladding was adequate because his flat was below 8 metres where the regulations remain less stringent. He said:
“It wasn’t reasonable for me to ever have checked that [the cladding issue] but it was reasonable for us to assume it was fit for purpose … the freeholder had a greater chance to uncover it. Because we had no chance, it was unreasonable for us to have that responsibility.”
It was a matter of who should have insured the building for defects. That would not be the leaseholders.
The central issue, however, will be the construction (ie interpretation) of the lease, specifically whether Part D, regarding defects, should be read with Part A, noted above, on maintenance, implying leaseholders pay for both; or do the two parts stand alone, implying the leaseholders do not pay for defects? If the latter, then “it’s fairly compelling” said Mr Andrew – though he also acknowledged the lease was unusual.
Ms Gourlay agreed. The relevant paragraph in Part D could not relate to Part A, she asserted. Mr Robert Bowker, for FirstPort, demurred. The wording on the leaseholders’ responsibilities such as “keeping and maintaining in good condition”, “to clean and treat” the building, to deal with “repair, order and condition” of the building particularly when “worn and damaged” – all these implied leaseholders had full responsibilities.
Importantly the 999-year “almost freehold” lease also suggested the leaseholders must bear the cost. “It would be an extraordinary construction of the lease that these costs aren’t recoverable,” said Mr Bowker
This is a significant point, which Mr Bowker had no time to develop. The leaseholders had argued that they had no economic benefit from improving the cladding – that went to the freeholder. But they are wrong. The very fact that the flats are worth little or nothing now but will, presumably, become saleable again once the work is done shows what leaseholders have to gain (albeit only to get back the value they once had). Given the freeholders will, for practical purposes, never have their property back again (unless it’s abandoned), means they have no economic benefit from the recladding. They get their ground rents whatever – but surely can’t have responsibilities to maintain the buildings until the early years of the 31st century?
On the other hand if the issue is an insurance matter, that throws up more complications. Who would most logically take out insurance? That responsibility should fall on the management group, surely? Individual leaseholders would be unwilling to do that since they don’t constitute a collective legal body. But even if the managers are responsible for arranging insurance, the cost of it would fall on the leaseholders since it is their property interests being protected.
But, anyway, can insurance cover a government changing its mind about what is legal and safe cladding? In another cladding case, Slough’s Nova estate, the buildings had a BLP Building Warranty insurance policy, but the freeholder says it doesn’t cover the cladding situation. FirstPort has also called on its insurer but with no luck.
So this could open a whole new battle front.
See also: Was the Grenfell Tower cladding really banned material?
• Here is a report on Andrew’s judgment in this case: Leaseholders must pay.
A warning from the judge
Because of the intense interest in this case, Mr Andrew sought to make clear that it might not be as significant as freeholders and leaseholders in general might believe. He noted that the First Tier Tribunal (Property Chamber) had limited jurisdiction derived from the Landlord and Tenant Act 1985, and could:
- Determine if an estimated cost for work a freeholder or managing agent seeks to do is reasonable or actual costs are reasonably incurred (so this applied to the £500,000 costs for cladding plus £4,000 a week firewatch);
- Decide whether those costs are receivable [ie by the freeholder/manager from the leaseholders] under the terms of the lease.
Furthermore any decision he came to “cannot be read across to another block of flats; it doesn’t set a precedent”. There are no standard leases “Whether lessees can negotiate is open to question, but that’s the position in law.”
[Property law reformers have tried to have legislation to set standard terms in all leases but been balked by English law’s tendency to favour freedom of contract – even though it is questionable, as Mr Andrew suggests, whether leaseholders have much power to negotiate terms more favourable to them.]
“It is not the function of this tribunal to consider any claim that the lessees might have against the original developer or a third party, for example the local authority over certification. I am not suggesting there are such claims but if there are it would have to be a matter of determination by [another] court.”
So, in other words, if leaseholders feel there are negligence claims or that they were misled in any way when buying their flats or that the block was sub-standard when being built, they would have to look elsewhere for redress – probably the high court. The matter is complicated (though Andrew didn’t examine this) by the fact that when the cladding was put in, the material was probably compliant with the government regulations (as suggested regarding Grenfell here: Was cladding banned?). The tougher regulations came in very shortly after the Grenfell fire.