Building Safety Act 2022

Answer

The Building Safety Act 2022 (the BSA) was introduced following an independent review in the wake of the Grenfell Tower tragedy. It’s part of a series of wide-ranging measures introduced by the government to improve the fire safety in tall buildings. In particular, it places a duty on relevant parties to remediate defects that give rise to building safety hazards by creating a more rigorous regime of accountability and enforcement for those involved with the construction and management of relevant buildings. Remediation work in relation to existing buildings can be complex and come with significant expense – estimated at around £15 billion. Therefore, the question of who should bear these costs has been highly contentious. The BSA deals with the financial implication for ‘qualifying leaseholders’ by implementing a series of protections that aim to limit the amount that can be recovered by a landlord in relation to these types of costs through a service charge.

What’s a relevant building and who are the qualifying leaseholders?

The protections will apply only to those occupying a ‘relevant building’ for the purposes of BSA. Broadly, this will be satisfied where a self-contained building has at least two dwellings and is at least 11 meters high or has five storeys. Therefore, a high proportion of urban residential flats will be included in this definition.

The restrictions on service charge will apply to works to remediate a ‘relevant defect’. This is a defect caused by works to the building that creates a ‘building safety risk’. This includes anything that causes a risk to the safety of people arising from a risk of fire or collapse of the building.

The final hurdle is to establish that the individual is a qualifying leaseholder. For a tenant to qualify for the relevant protection, their lease itself must have been granted for 21 years or more and contain provisions for the tenant to pay a service charge. In addition, it must have been granted before 14 February 2022 and, at the beginning of this date, the dwelling must’ve been the tenant’s principal home (or at least they must not have had more than two other residential properties in the UK). These provisions effectively ‘fix’ the status of a qualifying lease at the date of 14 February 2022. Accordingly, the transfer of qualifying lease after this date will not affect its status.

The protections for qualifying leaseholders

Qualifying leaseholders have significantly more cost protection when compared to their non-qualifying counterparts. Given that one of the key drivers for building safety reform was the Grenfell Tower tragedy, it’s notable that complete protection for cladding remediation is available only to qualifying leaseholders. This complete protection from the financial impact of remediation covers the replacement of unsafe cladding that forms part of an external wall.

Similarly, landlords are unable to recover costs from qualifying leaseholders that concern the provision of professional services relating to liability for relevant defects, such as court proceedings and legal advice.

Qualifying leaseholders also benefit from a number of protections that are based on financial factors:

• Low-value leases – if, on 14 February 2022, the value of the lease was less than £175,000 (or £325,000 within London), a landlord can’t recover remediation costs from a qualifying leaseholder.
• Contribution condition – where a landlord (together with its group) has a net worth of more than £2 million per relevant building, no service charge relating to remediation works can be charged to a qualifying leaseholder.
• The permitted maximum – this provision restricts the maximum amount of service charge payable by qualifying leaseholders to £10,000 (or £15,000 within London) if the value of the lease was below £1 million on 14 February 2022. If the lease exceeded this value, a landlord can charge a significantly higher service charge, up to £100,000 in some cases.

What about non-qualifying leaseholders?

Although the BSA does include some protections for non-qualifying leaseholders, they’re much less extensive. The primary safeguard for leaseholders (both qualifying and non-qualifying) in this regard is the fact that if the landlord or any superior landlord was responsible for the relevant defect as of 14 February 2022, no service charge will be payable. A landlord will be seen as ‘responsible for’ a defect where they undertook the works themselves or were in a joint venture with a developer. Accordingly, where a landlord has commissioned major refurbishment works that are found to be defective, the landlord will be responsible and can’t pass the remediation costs onto leaseholders.

Further, where the BSA restricts cost recovery from qualifying leaseholders, a landlord is prohibited from making up any shortfall from the non-qualifying leaseholders.

Summary  

The BSA has provided a range of protections for leaseholders, the extent of which depends on several factors, including the financial position of the landlord and whether the leaseholder can be classed as a qualifying leaseholder. The protections are extensive for qualifying leaseholders as they provide complete immunity for cladding replacement costs and obliges high-net-worth landlords to pay for all forms of remediation.

While both categories of leaseholder benefit from protections where the landlord is deemed responsible for the defects, the further protections offered to non-qualifying leaseholders are more limited. The BSA attempts to balance the financial burden by ensuring that landlords can’t recover a disproportionate amount of service charge from those that don’t benefit from a qualifying lease. Although this provision adds certainty by effectively placing cap for non-qualifying leaseholders, this may provide little comfort to the minority of non-qualifying landlords that hold low-value interests in the property and must contribute thousands towards remediation.

Alex Hinchcliffe is a trainee solicitor at Shoosmiths.