JB Leitch Case Success in Determining the Reasonableness of Service Charges in the Replacement of Unsafe Cladding

Following on from our recent article on our success in a recent service charge apportionment matter for building safety works, JB Leitch were last week week successful at the First-tier Tribunal (Property Chamber) (“the Tribunal”) in a determination of reasonableness of service charges in the replacement of unsafe cladding. Legal Director Phil Parkinson and Trainee Solicitor Lauren Walker summarise the case and the key points the case highlights…

Background

The property in question is a mixed-use building, consisting of a number of commercial units on the lower ground and ground floors as well as 46 residential units. Due to identified issues relating to the external façade, works are required that will involve the replacement of non-ACM cladding and are deemed essential in order to ensure the safety of the residents and the building. Legal submissions placed reliance upon a complex contractual matrix relating to the Head Lease and varying Under Lease interests and required analysis of the apportionment and liability for service charges to be incurred in relation to the replacement, repair and maintenance of the structure and external wall system.

A number of leases were presented to the Tribunal for consideration. The Head Lease was subject to 46 underleases. Thirty-six of these underleases were originally granted to a housing association, who in turn sublet 22 of the flats on shared ownership leases and 14 on short tenancies. However, 8 of these flats have since moved into private ownership, with the shared ownership leaseholder or social housing tenant taking an assignment of the relevant underlease from the housing association. The remaining 10 underleases are long residential leases granted to private purchasers from grant.

The Challenge

A key consideration for Tribunal was the variation in wording within the underleases – referred to as Lease Form A and Lease Form B.

Within Lease Form A, 22 of the housing association leases (and similarly the 10 private residential leases) define the Maintained Property in paragraph of the Second Schedule as follows:

"The Maintained Property shall comprise (but not exclusively):

1.1 The Accessways and the Communal Areas …bin and gardeners management stores and other storage facilities (if any) refuse stores and cycle stores

1.2 The internal common parts of the Block

1.3 All doors and window frames not forming part of the demise of any of the Dwellings

1.4 All Service Installations not used exclusively by any individual Dwelling

Within Lease Form B, the remaining 14 housing association leases define the Maintained Property in Paragraph 1 of the Second Schedule as follows:

"The Maintained Property shall comprise (but not exclusively):

1.1 The Accessways and the Communal Areas the drying area (if any) bin and gardeners management stores and other storage facilities (if any) refuse stores and cycle stores

1.2 The Common Parts

1.3 All doors and window frames not forming part of the demise of any of the Dwellings

1.4 All Service Installations not used exclusively by any individual Dwelling

Unlike in Lease Form A, the reference to common parts in paragraph 1.2 is not restricted to internal common parts. In Lease Form B, 'the Common Parts' are defined at Clause 1 as including the external parts of the Block, specifically:

“"the Common Parts" means (a) the structural parts of the Block including the roofs, gutters, rainwater pipes, foundations, floors and walls bounding individual Properties and all external parts of the Block including all decorative parts thereof ...”

It was our client’s contention that if BSF funding, which had been applied for, is not granted in respect of the Works, the costs of the Works are payable by the Respondents via the service charge provisions of the Leases and the shared ownership leases.

Secondly our client wished to seek a determination that the terms in Lease Form A, which refer to maintenance of the internal common parts of the Block, do so in error and are evidently capable of correction by construction and further, that the schedules of those Leases indicate a clear intention that the terms should have referred to the external common parts of the Block to avoid the Leases being silent on this point. In short, it was argued that all the Leases should be read as referring to ‘Common Parts' to include both internal and external common parts, as was the case with the 14 housing association leases in Lease Form B.

The Decision

The Tribunal stated that the first premise of the Applicant’s application would require the Tribunal to read into Lease Form A (which refers twice to the internal common parts) a reference to external common parts on the basis that there is clearly an error given the reference to external common parts in the other forms of lease. However, on the basis that the Tribunal had determined the costs associated with removing and replacing cladding as reasonable and proper expenses to be demanded to leaseholders, it was noted that there was no requirement for the Tribunal to consider this first premise as it does not simply require a determination as to the meaning of the relevant terms, but the rewriting of terms so as to give them a different meaning.

Of central importance, the Tribunal noted that removing and replacing cladding which represents a fire risk is clearly a reasonable and proper expense to be incurred by the landlord and so the reasonable costs of doing so can be demanded from all leaseholders.

Secondly, the Shared Ownership Leases, by reason of its requirement to comply with the Superior Lease, clearly required payment of their share of the cost of replacing the cladding – based on a schedule consistent and common across all of the Leases.

Summary

The determination, which at the time of writing, may be subject to appeal, serves to illustrate that despite error, the issue of ensuring safety remains the overriding priority. Our client demonstrated both rigour and caution in seeking the determination and the reasonableness and proportionality of the decision provides a balanced outcome.

Of further note, the case provides a cautionary example of the need to ensure clarity and consistency in the drafting and potential variation of lease terms and schedules. As ever, we would advise that Landlords and Managing Agents undertake these reviews diligently, and with the introduction of the Building Safety Act and new Fire Safety Regulations, the need for clear, unambiguous and comprehensible lease terms has never been of greater importance.

If you would like to discuss this article, and the issues surrounding service charge recoverability in the context of building safety, please contact us.