The Building Safety Act 2022 (the BSA 2022) came into force on 28 June 2022.
Part 5 of the BSA 2022 makes provision for the remediation of historical building defects that give rise to building safety risks. Sections 116 -122 and Schedule 8 of the BSA 2022 restrict the extent to which the costs of remediation can be charged back to leaseholders via service charge. This article will provide a broad overview of the leaseholder protections which relate to service charge.
References to sections and schedules in this article are to sections and schedules of the BSA 2022.
Application of the leaseholder protections to service charge
Relevant building
The starting point for the application of the leaseholder protections is determining that the building in question is a "relevant building", as defined by section 117(2). Broadly, the building will be a "relevant building" if it is in England and is a high rise multi-storey residential or mixed-use building which has at least two dwellings where the leaseholders do not have any interest in the freehold. The height requirement is at least 5 storeys or 11 metres.
Relevant defect
It is then necessary to establish whether the relevant building is affected by a "relevant defect" as defined by section 120(2), which broadly covers historical building safety defects which cause a building safety risk from the spread of fire or collapse of the building or part of it, such as combustible cladding or defective foundations.
Qualifying lease
Having established a "relevant building" and a "relevant defect", also relevant to the application of the leaseholder protections is whether a leaseholder has a "qualifying lease" as defined in section 119(2).
The following criteria must be met to establish a qualifying lease:
- The lease must be of a single dwelling for a term exceeding 21 years.
- The lease requires payment of a service charge and the sum payable from time to time is not fixed (i.e. where the sum varies according to the actual cost of services).
- The lease was granted before 14 February 2022 (importantly, any lease statutorily extended after this date will not be treated as granted before this date) and,
- on 14 February 2022,
- the dwelling demised under the lease was a tenant's only or principal home
- the tenant did not own any other dwelling in the United Kingdom, or
- the tenant owned no more than two dwellings in the United Kingdom apart from their interest under the lease.
Operation of leaseholder protections
The leaseholder protections operate as a tiered set of protections such that:
- landlords who are deemed "responsible for" the relevant defects within the meaning of paragraph 2 of Schedule 8 are unable to pass any costs associated with relevant defects onto leaseholders (which we refer to as the Tier 1 Protections)
- landlords who are not responsible for the relevant defects but meet a prescribed wealth test (known as the "contribution condition") are unable to pass any costs associated with relevant defects onto leaseholders with qualifying leases (which we refer to as the Tier 2 Protections), and
- landlords are unable to pass certain costs associated with relevant defects onto leaseholders with qualifying leases, irrespective of whether the landlords are deemed responsible for the relevant defect or meet the contribution condition (which we refer to as the Tier 3 Protections).
It can be seen that a "qualifying lease" is only relevant to the application of the Tier 2 and Tier 3 Protections.
When do the Tier 1 Protections apply?
Landlord/associated person responsibility
No service charge is payable whatsoever for remediation costs where the landlord on 14 February 2022 is "responsible for" the relevant defect or is associated with a person (the most likely association being by way of group companies) who is responsible for the relevant defect. The legal test is set out in paragraph 2 of Schedule 8.
The landlord / associated entity will be responsible if it was the developer (or in a joint venture with the developer) or otherwise commissioned or carried out the works relating to the defect.
A qualifying lease is not required to take the benefit of this protection, meaning that both commercial and residential leaseholders of a relevant building may benefit.
When do the Tier 2 Protections apply?
Contribution condition
If the landlord on 14 February 2022 met a prescribed wealth test (in broad terms, had a net worth of more than £2,000,000 per relevant building owned), the costs associated with remediating relevant defects cannot be passed onto leaseholders who have a qualifying lease.
When do the Tier 3 Protections apply?
Lease below certain value
The costs associated with remediating relevant defects cannot be passed onto a leaseholder if the value of their qualifying lease on 14 February 2022 was less than £325,000 in London or £175,000 elsewhere.
Cladding remediation
No service charge will be payable under a qualifying lease in respect of cladding remediation, which covers the removal or replacement of any part of a cladding system that forms the outer wall of an external wall system and is unsafe.
Legal/professional services
No service charge is payable under a qualifying lease in respect of legal or other professional services relating to the liability of any person incurred as a result of a relevant defect at a building. This includes obtaining legal advice and any proceedings before a court or tribunal.
Limit on sum of service charge: total permitted maximum
Broadly, the total sums of service charge under a qualifying lease being levied by the landlord for the cost of remediation works cannot exceed a permitted maximum. These costs will be associated with non-cladding defects and interim measures such as waking watches. The permitted maximum varies according to location and value of the property on 14 February 2022 that is the subject of the lease as set out below:
- London: £15,000.
- Outside London: £10,000.
Lease value as on 14 February 2022 (regardless of location):
- £1 million - £2 million: £50,000.
- More than £2 million: £100,000.
As well as future costs relating to historical building safety defects, costs that have already been incurred by the leaseholder under a qualifying lease in the five years prior to the 28 June 2022 count towards the permitted maximum.
Limit on sum of service charge: annual permitted maximum
A landlord cannot charge more than 10% of the permitted maximum (as set out above) in service charge for remediation works under a qualifying lease in a twelve-month period. This is to ensure the cost of remediation, where it is to be borne partly by leaseholders, is spread over a ten-year period.
Leaseholders without a qualifying lease
Those leaseholders who do not benefit from the Tier 1 Protections and who also do not have a qualifying lease and so cannot benefit from Tier 2 or Tier 3 Protections remain potentially liable for costs associated with remediation of the relevant defects (subject to the terms of their lease and other statutory controls). Unprotected leaseholders will not, however, be required to top up any shortfall that arises from a landlord's inability to charge all (protected) leaseholders.
Our comments
The protections available to leaseholders to prevent the costs of remediation of relevant defects in buildings from being flowed through service charge are wide ranging but the scope of protection varies depending upon whether the landlord on 14 February 2022, or a party associated with such a landlord, is deemed responsible for the defects, the landlord's net worth and whether the leaseholder has a qualifying lease.
Where the BSA 2022 deems the landlord responsible for historical building safety defects (i.e. where the Tier 1 Protections apply), a leaseholder without a qualifying lease is for the most part in no worse a position than a leaseholder with a qualifying lease. Both benefit from the Tier 1 Protections, although a leaseholder without a qualifying lease in this situation would not, for example, take the benefit of the protection from the costs of legal or other professional services incurred as a result of a relevant defect (because only those with a qualifying lease are eligible for that protection).
Where the BSA 2022 does not deem the landlord responsible for historical building safety defects, only leaseholders with qualifying leases are shielded from the costs associated with relevant defects. The degree of shielding depends on the extent to which the Tier 2 and Tier 3 Protections apply.
The BSA 2022 is a complex piece of legislation that requires careful and detailed analysis to assess the applicability of the relevant provisions to a particular building. We strongly advise any party affected by the statute to seek independent legal advice on the matter.
