When is Service Charge Not Payable Due to the Building Safety Act 2022?
It is clear that the purposes of the Building Safety Act 2022 (“BSA”), and in particular Schedule 8, is to seek to limit the costs payable by leaseholders, and particularly qualifying leaseholders, in respect of contributing towards the cost of works to remedy “relevant defects”. There are many issues that require clarification by way of further Regulations and Court guidance, but a question that we anticipate arising is; when is service charge not payable due to the BSA?
Limitations on recovery
There are various limitations provided under the BSA, which are summarised below; the below presumes that the developer has not agreed to fund the works, and the landlord is not responsible for undertaking the works.
They restrictions are set out below in order of most stringent restrictions on recovery. Where the condition in the more stringent restriction is satisfied, there is limited need for the landlord to consider the subsequent restrictions.
Protections for all leaseholders:
Where the landlord or associate is responsible for the defect:
Where the defect is an initial defect, a landlord (or associate) is responsible for the works if they were the developer or undertook or commissioned the works relating to the defect (or was in a joint venture with that person). In any other case, a landlord is responsible for the relevant defect, if they undertook or commissioned those works.
In either circumstance, no service charge is payable under the lease; as this paragraph doesn’t refer to a “qualifying” lease, then it is anticipated that it is intended to refer to all leases in the premises (i.e., including “non-qualifying leases” and commercial units).
Protections only for qualifying leaseholders:
A lease is a “qualifying lease” if it is (a) a long lease of a dwelling in a relevant building (b) the tenant is liable to pay a service charge (c) the lease was granted before 14 February 2022 and (d) at the beginning of 14 February 2022, the dwelling was the tenant’s only or principal home, they did not own any other dwelling in the UK, or they owned no more than two dwellings in the UK apart from their interest under the lease.
Leases of dwellings are presumed to be a “qualifying lease” until such time as the presumption is displaced, either via the leaseholder providing a leaseholder deed of certificate confirming that none of the conditions summarised above were met, or failing to respond to the request for the provision of the leaseholder deed.
The below restrictions only apply to a qualifying lease (i.e. the protections don’t apply to non-qualifying leases of dwellings and commercial units).
Cladding remediation
No service charge is payable under a qualifying lease in respect of cladding remediation. This means the removal or replacement of any part of a cladding system that forms the outer wall of an external wall system and is unsafe.
Works in respect of non-cladding remediation
Where the landlord meets the contribution condition:
Where, at 14 February 2022, a landlord group’s net worth was more than N x £2,000,000 (where N is the number of relevant buildings for which a member of the landlord group was a landlord under a lease of the relevant building), no service charge is payable under a qualifying lease in respect of a relevant measure relating to any relevant defect.
Low value leases/permitted maximum
Where a lease value is considered to be of a low (i.e. £325,000 in Greater London, or £175,000 in any other case), no service charge is payable under a qualifying lease in respect of a relevant measures relating to any relevant defects.
For all other qualifying leases, the recovery of relevant service charges is limited by a permitted maximum and annual limitation. Details on how that is calculated is set out in paragraph 5-7 of Schedule 8 of the BSA.
Other Considerations
Legal or Professional services relating to liability
No service charge is payable under a qualifying lease in respect of legal or professional services relating to the liability (or potential liability) of any person incurred as a result of a relevant defect. This limitation doesn’t incorporate fees for legal or professional services relating to other issues beyond that of liability.
Presumptions relating to landlords
Under paragraph 14, and by virtue of regulation 6(7) of The Building Safety (Leaseholder Protections) (England) Regulations 2022, where a relevant landlord fails to provide a landlord’s certificate in accordance with the Regulations, a landlord is treated as having met the condition in paragraph 2(2) of Schedule 8 of the BSA; namely they are treated as being responsible for the relevant defect. Therefore, a landlord cannot recover the costs from any leaseholder. It is therefore imperative that, where a landlord is required to give a certificate, they should use all best endeavours to ensure that the landlord’s certificate is provided within the requisite timescales. If a landlord cannot fully comply, then it should give a certificate with all information that it is able to provide, explaining what information is not included and why it has been unable to provide that information (such as requiring information from third parties, including the leaseholder).
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