Service charge issues in the wake of the Grenfell Disaster

1 August, 2018

No one will forget the horrifying scenes of the blaze that ripped through a tower block in West London in June 2017 which, we are told, was the result of the cladding that the block was encased in. The cladding in question is Aluminium Composite Material (“ACM Cladding”) and the block was of course Grenfell Tower.

 

With the first anniversary of the Grenfell Tower fire having just passed and the public enquiry hearings well underway, it seems an appropriate time to take stock of the impact the tragedy has had on those residents living in the some 200 blocks identified as having been clad using ACM Cladding and therefore at serious risk of a similar event.

 

On the recommendation of local fire services, including the London Fire Brigade(“LFB”), and the Department of Communities and Local Government (“the DCLG”), freehold owners of the affected blocks are proposing to have the ACM Cladding removed and replaced with alternative, safety approved, cladding and in the meantime implement additional safety procedures.

 

As with all works undertaken by a freeholder for the “benefit” of their leaseholders, the big question is always going to be “who will foot the bill?”. This has been a question that the First Tier Tribunal (“the FTT”) have been asked to determine in recent months as private landlords attempt to recover the cost to them of the measures they have put in place in the wake of the Grenfell Tower disaster. As it becomes apparent that the works that need to be completed to bring the affected blocks up to current safety standards are going to be incredibly costly, the fight to avoid liability for the cost is going to get more ferocious.

 

Of course, a landlord’s right to recover any costs it incurs in respect of the maintenance and upkeep of a building will be governed by the terms of the lease, as will a leaseholder’s obligation to pay such costs. With the LFB, together with its regional counterparts, and the DCLG having set out their recommendations that all ACM Cladding must be replaced, and interim measures put in place to avoid any risk to the leaseholders in the meantime, it is likely that the cost of the works will fall within the scope of a relatively standard clause in leases which requires the landlord to comply with statutory requirements, or the requirements of any competent authority, and, assuming they are doing just that, entitles them to recover the cost of such works from the leaseholder.

 

Leaseholders may well feel that this doesn’t seem fair and argue that this leaves them liable for the cost of putting right a mistake that was made by the landlord in using the ACM Cladding in the first place.

 

The most highly anticipated case in this area has to be the Citiscape case. The subject of that case was a private block of flats in Croydon which had, at some moment, been clad in ACM Cladding. On the application of the landlord, the FTT was asked to decide whether or not the estimated cost of the first stage of the cladding removal and replacement works in the sum of £483,000.00 was reasonable and payable by the leaseholders. The landlord anticipated a further charge of approximately £1.5m-£2m to complete the necessary works. The two questions the FTT asked, during the course of the drawn out hearing, was whether or not the lease allowed for the recovery of these costs from the leaseholders and whether or not there was any other plausible source of funds that could be used to pay for it.

 

In respect of the first question, and with reference to the decision in Credit Suisse v Beegas (1994) about the scope of the words used in the lease which contained the landlord’s maintenance obligations, it was decided that the replacement of the cladding fell within the landlord’s obligations as to “rectifying and making good any inherent structural defects”.

It was argued by the leaseholders that the landlord should attempt to recover any such costs from the building insurance. However, this wasn’t accepted and the FTT found that the leaseholders would have to pay the service charges but that it was open to them to pursue claims against various other parties, including the cladding manufacturers, the council’s building inspector or even central government, to try and recover these sums by way of damages. It is anticipated that this decision will have far reaching consequences for those 200 odd other blocks that have been affected. I expect that this is one of many decisions of its kind to come.

 

It isn’t just the replacement of the ACM Cladding which has been causing concern. Many landlords have been advised, and some required, to implement a Waking Fire Watch prior to the cladding being removed to avoid any imminent risk of a fire in the affected blocks. In the case of E&J Ground Rents No. 11 LLP and various leaseholders of Fresh Apartments, Salford (“Salford case”), although no enforcement notice or prohibition order had been served, the landlord, on the basis of the guidance produced by the DCLG and the Greater Manchester Fire and Rescue Service (“GMFRS”) in the wake of the Grenfell fire, implemented a Waking Fire Watch and looked to the leaseholders to pay the costs of the same through the service charge. In this case, the FTT found that the DCLG and GMFRS were competent authorities for the purpose of the leases and therefore, in the light of the terms of the leases, the costs associated with the Waking Fire Watch were recoverable from the leaseholders. The cost of a Waking Fire Watch was also in issue in the Citiscape case and again it was decided that the cost was recoverable from the leaseholders under the terms of the lease.

 

There have also been a spate of cases brought to the FTT by landlords asking for the service charge consultation requirements to be relaxed in respect of contracts for a Waking Fire Watch and the replacement of cladding on the basis that the need is urgent. Most of these cases have been decided in the landlords’ favour.

 

It doesn’t however appear that this is the end of the story. Most council owned properties that have ACM Cladding are being re-clad at no cost to the leaseholders. However, there has yet to be any requirement on private landlords to follow suit. Central Government are coming under increasing pressure to put in place some funding to assist private landlords and leaseholders with the recladding of the affected blocks and I imagine that pressure is only going to continue to mount as we pass the first year anniversary of the Grenfell Tower tragedy.