Note: Since this case Barratt, the builders, has agreed to pay for the cladding and firewatch.
The property tribunal considering who should pay for possibly unsafe cladding on a pair of London tower blocks, Citiscape, has delivered a blow to the leaseholders who own the individual flats. It has confirmed they must pay huge bills for replacement cladding after the Grenfell Tower tragedy highlighted dangers.
Leaseholders in the Croydon, South London, blocks had argued that the cladding – presumably perfectly legal when it went up – should now be treated as defective owing to post-Grenfell changes in regulation. They argued the freeholder, Proxima GR Properties, ultimately owned by the Tchenguiz family trust of property tycoon Vincent Tchenguiz, should pay. Or else the managing agent, FirstPort, should pay and then find who the money is due from: freeholder or developer or insurer or cladding manufacturer or possibly even the Government.
The Tribunal did indeed suggest one or other of these organisations might possibly bear responsibility for problem cladding – but that leaseholders would have to pay for the replacement cladding up-front and sue for damages in another court (assuming they have a good case).
FirstPort’s argument is that recladding is no more than maintenance – and so the leaseholders must pay under the terms of the lease, which assigns financial responsibility to leaseholders for “Inspecting, rebuilding, re-pointing, repairing, cleaning, renewing or otherwise treating as necessary”.
The First Tier Tribunal (Property Chamber) (which heard the case in February) backed the management company’s view – the costs of replacing the cladding (which will ultimately be £2m) and much of the “waking watch” of fire marshals patrolling the two blocks should be paid by the leaseholders (ie the owners of the individual flats, not the freeholder of the building, or anyone else).
It decided the inadequacy of cladding could not be regarded as a defect of the building itself (or “inherent building fault” as the lease put it) and consequently it constituted a matter of refurbishment. The Tribunal, with Angus Andrew as chairman, rejected the suggestion by the leaseholders’ lawyer, Amanda Gourlay, that, since the recladding was not “periodic expenditure” and since the cladding remains “as designed and constructed”, leaseholders were not liable.
Reference was made to Credit Suisse v Beegas Nominees Ltd  1 EGLR 76 where Mr Justice Lindsay found in a similar situation (albeit a commercial property) that comparable words had “a potential going beyond repairs strictly so-called”. The Citiscape decision says:
“The full phrase to which Ms Gourlay refers is: ‘moneys actually expended or reserved for periodical expenditure’. That is the phrase that draws a distinction between in-year expenditure and a reserve for future periodical expenditure such as external redecorating. Replacement of the re-cladding is an in-year cost.”
So, the Tribunal said: “the estimate or budget that gives rise to the on-account payments has two components: an estimate of in-year expenditure and an estimate of the reserve for future periodical expenditure. Both the waking watch and recladding costs are part of the first component”. Crucially the Tribunal also considered that:
“By granting 999 year leases the original freeholder was effectively relinquishing any capital interest in the flats. There is no prospect of the freeholder receiving other than nominal premiums either on enfranchisement or on individual lease renewals under the Leasehold Reform, Housing and Urban Development Act 1993. In such circumstances it is reasonable to conclude that the parties would have intended that all future costs associated with the blocks would be the responsibility of the tenants [ie leaseholders]. That intention is reinforced by the use of identical words to define both the manager’s obligation to undertake work and the tenant’s obligation to pay for it.”
Freeholders gain money, not from rents, but from individual leaseholders occasionally updating their leases (ie paying to add back years as they pass). In this case that is not a realistic stream of income since 999 years is “almost as good as freehold”. Although the freeholder is paid ground rent, the reality is that the leaseholders “own” their flats and hence, to all intents and purposes, the building that contains them.
This tribunal does not set precedents for other cases (especially given leases are not standardised) but it has enunciated a principle that other courts are likely to follow. If faulty cladding (ie cladding that is now deemed faulty post-Grenfell fire) is defined by courts as a matter of maintenance rather than as fundamental defects in the buildings, leases are more than likely to be interpreted as assigning the responsibility for recladding to leaseholders in other cases that come before the courts (unless there is clear assignment of responsibility in the individual leases).
The decision has left the Citiscape leaseholders facing a bill estimated at £2.4m (the £480,000 that was the subject of the case was a rough and ready early estimate; only later can FirstPort call on leaseholders for the rest.) In January the Ministry of Housing said it had identified 300 blocks with the Grenfell-style cladding. This judgment will have significant implications for thousands of leaseholders. Is there more they can do if they come up against Tribunal judgments like this one?
This blog gives no advice but merely notes that the First Tier Tribunal (Property Chamber) does not look at issues of tort or damages for failings of builders, developers, freeholder/managing agents or public bodies in cases like this. The Tribunal decision notes:
“It is foreseeable that the tenants may have claims against a number of parties: against the manufacturer of the cladding in particular if any warranties were given as to its suitability: against Barratt Homes if they were negligent as to the selection and installation of the cladding: against the Local Authority if there were errors in the certification process: against the DCLG if, as been suggested elsewhere, the relevant building regulations were not fit for purpose.”
But, even if any leaseholders have cases against such people (and Andrew was at pains during the tribunal case to say that he was not suggesting they had), “the tenants would find themselves mired in litigation for many years during which time their flats would be effectively unsalable”. Sadly this is a story that has a long way to run.
Note: More detail on the case is below
• A report on the Citiscape Tribunal hearing is here
• This piece has all sorts of material on the regulatory framework for cladding: Was Grenfell cladding banned?
• Nearly Legal has now reported on the decision here
The estimated costs of £483,000 to replace the cladding included in the 2017/18 budget was reasonable and a service charge [on the leaseholders] is payable for those estimated costs. The costs of the waking watch to 19 December 2017 were reasonable and a service charge is payable for them. On the costs of the waking watch after 19 December 2017, either party may apply for a determination of the reasonableness after the end of the current service charge year.
• DCLG Update on cladding testing August 2017
• FirstPort application to dispense with the statutory requirement to consult leaseholders on work RPT December 2017
Note: In this Tribunal case the cladding is described as “category 3 of the classification set out by DCLG, being ACM cladding with an unmodified polyethylene filler”. The DCLG testing advice in the Update notes: “A category 1 result meets the limited combustibility classification, whereas category 2 and category 3 results do not, though category 2 materials would be expected to perform better in a fire as they typically contain materials that can contribute to some limitation of fire development.” This suggests, if the evidence to the 2017 tribunal is correct, that the type of cladding used was quite the wrong sort for tall buildings. But it’s complicated, as the Was Grenfell cladding banned? points out.
Note on the Citiscape case
The issue of who pays what to replace tower block cladding found dangerous after the Grenfell tragedy comes down to the individual leases for each block – as things stand. Most of these are likely to be fairly clear: people who have bought flats in a block, whether from a private developer, a private individual or a local authority – the leaseholders – are likely to have to pay, as they have to pay for all refurbishments. A freeholder or a management organisation may get the work done, but the bill lands on the leaseholders mat.
But the devil is in the detail. There is no such thing as a standard lease, and the Government has baulked at introducing standard leases for leasehold properties. So in some cases there may be no procisions for the post-Grenfell situation – where a government change in regulation requires stripping off what was hitherto deemed acceptable cladding.
The Citiscape case is just such a situation. The Tribunal chair, Angus Andrew, has noted that the Citiscape leases were “strangely drafted”. Among the oddities is a clause that allows the ground rent to change in relation to the value of the flats within it. Doubtless this was intended to allow the freeholder to gain some of the value of rising prices – but it also means the freeholder losing out to some extent if the flats have become worthless.
Here the leaseholders denied that their lease required them to pay for defects (as opposed to damage or deterioration), and insisted the Government’s changed regulation in effect turned their cladding at a stroke of a pen into defective material.
Leaseholders’ obligation to pay for maintenance is described thus in the leases:
“Maintenance Expenses means the moneys actually expended or reserved for periodical expenditure by or on behalf of the Manager or the Lessor at all times during the Term in carrying out the obligations specified in the Sixth Schedule.”
The lease covered the issue in two parts: In the Part A of the 6th schedule to the lease it talked of the leaseholders’ requirement to pay for maintenance in these terms:
“Inspecting, rebuilding, re-pointing, repairing, cleaning, renewing or otherwise treating as necessary and keeping the Maintained Property comprised in the Block and every part thereof in good and substantial repair order and condition and renewing and replacing all worn or damaged parts therefore.”
And in Part D it talked separately of “inherent structural defects” – remedying which was not, the leaseholders claimed, payable by leaseholders. Thus:
“(Costs applicable to any or all of the previous parts of this Schedule)
15. All other reasonable and property expenses (if any) incurred by the Manager in and about the maintenance and proper and convenient management and running of the Development including in particular but without prejudice to the generality of the foregoing any expenses incurred in rectifying or making good any inherent structural defect in the Building(s) or any other part of the Development (except in so far as the cost thereof is recoverable under any insurance policy for the time being in force or from a third party who is or who may be liable therefore) any interest paid on any money borrowed by the Manager to defray any expenses incurred by it and specified in this Schedule any costs imposed on the Manager in accordance with Paragraph 3 of the Seventh Schedule any legal or other costs reasonably and properly incurred by the Manager and otherwise not recovered in taking or defending proceedings (including any arbitration) arising out of any lease of any part of the Development or any claim by or against any lessees or tenant thereof or by any third party against the Manager as owner lessee or occupier of any part of the Development.” (Emphasis added)
In contrast the management group put in by the original freeholders, FirstPort, said the two parts were to be read together, Part D, presumably, being a gloss on Part A, not an exclusion. It envisages a situation where costs might be recoverable from a third party (an insurer is mentioned but potentially the freeholder or developer might be in the frame), but FirstPort asserted this was not such a situation. It had, anyway, knocked on the freeholder’s and insurer’s door with no luck.
This is what the leaseholders’ lawyer, Amanda Gourlay, said of paragraph 15 Part D in the lease: “That’s not the place where you would expect a provision relating to building work that’s expensive ie to defects. It was not designed to deal with part A.”
Judge Angus Andrew: “It’s a strangely drafted lease in some ways. A way of looking at it is it must have intended references to inspect ie clause 15 must have referred to structural defects.”
Robert Bowker (for FirstPort) insisted it would be “an extraordinary interpretation of the lease” to suggest the costs weren’t recoverable from the leaseholders. He pointed to the terminology of the leaseholders’ obligations: Para 5 of Part A is about pointing, keeping and maintenance in good condition; there are at least 14 obligations that arise from that: ‘clean and treat’, ‘repair’, ‘order and condition’, ‘worn and damaged’.
He asked two questions: “Is a cladding system that presents a fire risk a system in good order?” (His implication is “No”, and hence it is an obligation on leaseholders to fix it.) “Why is the decision to replace it, not a decision to renew the system?” (In other words part of keeping it in order and good condition, maintain it, hence, again, part of the leaseholders’ duties.)
Gourlay had also argued that the estimate to deal with the cladding (about £485,000) was acknowledged to be too low and hence should be regarded as unreasonable. The Tribunal panel said:
“This is the first occasion that any of us can recall on which a lessee or group of lessees have come before us to object to an estimated or actual cost on the grounds that it is too low.”
Gourlay’s position was dismissed on the grounds that FirstPort were not wrong to get a speedy, albeit inadequate, estimate when the problem arose. The rest of the money, potentially adding up to £2.4m, cannot be collected until October under the terms of the lease.
Extract from the decision on the ‘tripartite leases’
20. The leases are all for terms of 999 years and were all made between Barratt Homes Limited, Peverel OM Limited and an individual lessee. They are therefore tripartite leases. Peverel OM Limited was originally either a subsidiary or an associate company of Barratt. We were told that it subsequently changed its name to FirstPort Property Services Limited and that it is not connected to the current freeholder.
21. Traditionally flat lessees [leases] were for terms of 99 years and were granted by a landlord to a tenant. The landlord maintains the building and recovers the costs through the service charge. The perceived advantage of such leases is that both parties have a capital interest in the building and therefore a common interest in ensuring that is was properly maintained.
22. As the market for leasehold flats developed landlords sought ways of divesting themselves of responsibility for maintaining the property. They did so by the use of tripartite lessees in which the maintenance responsibility is transferred to a third party. In the majority of cases the third party is a company controlled by the lessees who clearly have a capital interest in the property. However in a small number of cases, of which this is one, the third party is a professional manager that has no capital interest in the property. As Mr Bowker [FirstPort lawyer] conceded, the manager is in reality a managing agent.
23. As with other tripartite leases the freeholder’s continuing obligations are minimal and consist of little more then a covenant for quiet enjoyment although it is required to step into the managers shoes if the manager goes into liquidation or “fails to observe and perform” its obligations.
Landlord and Tenant Act 1985
S 18: Meaning of “service charge” and “relevant costs”
(1) In the following provisions of this Act “service charge” means an amount payable by a tenant of a [dwelling] 1 as part of or in addition to the rent—
(a) which is payable, directly or indirectly, for services, repairs, maintenance [, improvements] 2 or insurance or the landlord’s costs of management, and
(b) the whole or part of which varies or may vary according to the relevant costs.
(2) The relevant costs are the costs or estimated costs incurred or to be incurred by or on behalf of the landlord, or a superior landlord, in connection with the matters for which the service charge is payable.
(3) For this purpose—
(a) “costs” includes overheads, and
(b) costs are relevant costs in relation to a service charge whether they are incurred, or to be incurred, in the period for which the service charge is payable or in an earlier or later period.