What is the price of safety? And who pays the price?

This article was first published on Practical Law’s Property Blog.

Background

On  14 June 2017, 72 people were killed when a huge fire engulfed the Grenfell Tower Block in West London. As we approach the anniversary of that appalling disaster, the inquiry into what happened has only just begun, with harrowing accounts from witnesses and survivors. One thing that does seem clear however, is that the retro-fitted cladding which was applied to the outside of the tower was entirely useless in slowing the blaze. Indeed, it seems that the cladding was itself flammable, feeding the flames, and was fitted in such a way as to aid the spread of the blaze.

The fire provoked panic amongst owners of blocks of flats and there was a rush to discover whether these too were clad in the same apparently lethal substance. Many block owners have discovered that they do indeed have this dangerous cladding, and have put plans in place to replace it. In the meantime, a lot of landlords have put safeguarding measures in place, such as round the clock “waking watch” patrols. The inevitable question then arises: who pays for the waking watch and the refurbishment or replacement of the defective cladding?

Naturally, tenants in blocks where such cladding has been used are anxious about their safety, and are likely to feel that it is not their “fault” that such cladding has been used, and that the landlord should pay to put it right. Equally, landlords are likely to feel that it is not their “fault” either, where all the proper checks and certifications have been carried out. What is clear however, is that the cost of such replacements will be high.

This issue has recently come before the First-tier Tribunal (Property Chamber) in Firstport Property Services Ltd v Various leaseholders of Citiscape LON/00AH/LSC/2017/0435.

Overview

Citiscape is a development of two blocks of flats in Croydon, South London. The taller block is some ten stories high, the smaller about six stories, with a total of about 95 flats. The blocks were built in 2001 by Barratt Homes.

In the wake of the Grenfell disaster the landlords sought assistance from the London Fire Brigade, who advised there be a 24 hour waking watch. This was to cost some £263,000 per annum. The landlords assumed that the cladding would need replacing and their own internal surveyor estimated that this would cost about £480,000.

Subsequently, the landlords commissioned a report which confirmed that the cladding in place was indeed the “Grenfell style” cladding and would need replacing. Estimates given ranged from about £1.8m to £2.5m.

The leases in question are in a relatively standard tripartite form. That is, the builders, Barratt Homes (in fact their successors in title), remain the freeholders with relatively few obligations. All the repairing obligations fell on the management company, Firstport.

The issues before the tribunal came down to an examination of the crucial Schedule 6 of the lease, which dealt with service charge contributions by leaseholders.

Part A of Schedule 6 (“Estate & Block Costs”) provided that maintenance expenses included:

“5. 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.”

Part D of Schedule 6 (“Costs applicable to any or all of the previous parts of this Schedule”) provided that maintenance expenses also included:

“2. Providing and paying such persons as may be necessary in connection with the upkeep of the Maintained Property.

10. Complying with the requirements and directions of any competent authority and with the provisions of all statutes and all regulations orders and bye-laws made thereunder relating to the Development insofar as such compliance is not the responsibility of the lessee of any of the Dwellings.

11. Providing inspecting maintaining repairing reinstating and renewing any other equipment and providing any other service or facility which in the opinion of the Manager it is reasonable to provide.

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.”

The Hearing

Despite a lengthy hearing, the multiple issues in essence  came down to two questions:

• Was there any other realistic source of funding for the works?
• Did the terms of the lease in any event cover the work contemplated or the waking watch?

The Outcome

Not surprisingly perhaps, the provision of the waking watch was held to be payable as service charge by virtue of Part D, paragraph 10 (direction of a competent authority, that is, the Fire Service) and also under Part D, paragraph 15 (convenient management and running of the development).

The status of the cladding was a more vexed issue. The leaseholders raised the argument that the replacement of the cladding was not as such a “repair” because it was not out of repair: it was simply dangerous.

However, the tribunal found that the wording of the leases went beyond simple “repairs”. “Renewing or otherwise treating as necessary” clearly contemplated something over and above a mere repair. Equally, “in good and substantial repair order and condition” went beyond a simple repair because the fire risk from the cladding meant that the blocks could not be said to be in such a condition. The managing agents were also entitled to recover the costs of “rectifying or making good any inherent structural defects”, which would encompass removing the cladding. The tribunal relied on Credit Suisse v Beegas (1994) 4 All ER 803, in which Lindsay J considered lease wording which went beyond simple repair.

As to the leaseholders’ argument that they should not be liable where the freeholder or managing agent had recourse to other funding, for example through insurance or other means (such as litigation), the tribunal found that this was in principle correct. But the managing agent had as a matter of fact sought payment from the developer and indeed from the insurer, and had been rebuffed at every turn. The tribunal found that the wording of the leases could not be considered to require the managing agent to resort to litigation. “Recoverable” could not be extended to speculative litigation, but meant a claim with a degree of certainty.

Comment

This is a First-tier Tribunal decision on specific leases with specific wording, and so cannot be regarded in any way as a precedent. In particular, the tribunal noted that the managing agents’ obligations to maintain under the lease, and the leaseholders’ obligation to contribute, were contained in the same sections of the lease and were therefore identical. Therefore, insofar as the managing agents were obliged by the lease to carry out certain works or provide certain services, the leaseholders would be obliged to contribute to them.

The tribunal thought it was important that the leases granted were very long: 999 years.  In that context, the Tribunal held, the freeholder had no real remaining financial interest in the blocks. It must have been contemplated therefore that the leaseholders themselves would take on the costs of the blocks. In other words, there should not be a lacuna between works which the freeholder or agent was obliged to carry out, and costs recoverable from the leaseholders, who were the only ones with any real financial interest in the blocks.

The leaseholders sought to take some comfort from the decision where the tribunal (at paragraphs 66 and 67) appeared to suggest that they might have potential actions against all sorts of other parties: for example, the developer, the manufacturer of the cladding and the Local Authority. But these comments need to be read in the context of the leaseholders’ submissions that they are not liable if alternative funding can be found through these routes. But as the tribunal made clear, the fact that there was a potential for recouping the expense through speculative litigation did not absolve the leaseholders of their primary obligation to contribute to the works which the managing agents were obliged to carry out.