Building Safety Bill

Written evidence on the Building safety Bill submitted by Amanda Gourlay , Barrister.

( BS B 04 ).

1. This submission identifies the problems that are likely to arise from the Building Safety Bill (the "Bill") if steps are not taken to control leaseholders’ liability to pay their landlord’s legal costs if/when they withhold payment or are involved in First-tier Tribunal (Property Chamber) proceedings relating to the building safety charge.

2. In September 2018, I submitted evidence to the Housing Communities and Local Government Select Committee Inquiry into leasehold reform. That evidence focused on the inequality of arms between landlords and tenants in service and administration charges. Those issues continue to arise.

3. This submission is modelled on that evidence, and in places repeats the same text, because the same issues arise in relation to the building safety charge.

4. There is a significant risk that the covenant implied into leases by the new section 30D of the Landlord and Tenant Act 1985 ("the 1985 Act"), inserted by clause 120 of the Bill, will operate to encourage landlords to intimate forfeiture action against and to charge their legal costs to leaseholders who have allegedly failed to pay their building safety charge.

5. It is already difficult to navigate the technicalities of the law of service and administration charges without specialist legal advice, and the Bill adds a further layer of complexity. The cost of obtaining legal advice often outweighs the amount of money at stake, and landlords are regularly entitled to charge their legal costs to leaseholders. I have never seen a lease where a tenant has the converse right.

6. This submission is made in my capacity as a barrister. It represents my professional view, but not that of any other member of Tanfield Chambers.

The Building Safety Bill

 

7. The Bill implies certain obligations into the leases of higher risk buildings. The most relevant obligation for current purposes is the obligation on a tenant to pay a building safety charge.

8. Clause 120 of the Bill inserts a new Schedule – Schedule 2 – into the 1985 Act. That Schedule repeats (and to a certain extent seeks to remedy certain failings in) the current service charge regime. It is disappointing that, despite the Government’s long-stated intention to reform the law of service charges [1] , on the whole it has nonetheless cleaved to the existing law.

The implied term

9. Clause 120 also inserts a new section 30D into the 1985 Act. By section 30D(3):

In the lease there is implied a covenant by the tenant to pay to the landlord any building safety charges that are required be paid by the tenant in accordance with Schedule 2.

10. In other words, the leaseholder promises to pay any building safety charge that the landlord demands of them, provided that the demand complies with Schedule 2.

11. The issue to which this submission is directed arises from the implication of that promise into the lease.

The building safety charge

12. By paragraph 1(2) of Schedule 2:

"Building safety charge" means a charge in respect of the building safety costs

13. By paragraph 1(3) of the same Schedule:

"building safety costs" are the costs or estimated costs incurred or to be incurred by or on behalf of an accountable person or a special measures manager for a higher-risk building in connection with taking building safety measures.

14. Paragraph 4(1) provides that:

Building safety costs may be taken into account in determining the amount of a building safety charge payable by a relevant tenant only to the extent that such costs are incurred or to be incurred by or on behalf of an accountable person or a special measures manager for a higher-risk building in connection with taking relevant building safety measures.

15. The activities constituting relevant building safety measures are listed in paragraph 4(2).

16. Paragraph 1(5) gives some detail of the costs recoverable "in connection with" those activities. They include:

(a) legal fees (to the extent not otherwise recoverable)

(b) other professional fees

(c) fees payable to the regulator

(d) management costs.

17. It is concerning that by virtue of the above and paragraph 10 of that Schedule, it appears to be the policy that the legal costs of proceedings may be included amongst the costs of taking relevant building safety measures of the new Schedule 2 to the 1985 Act. Paragraph 8 of the Schedule sets some – arguably superfluous – limits on the scope of the costs recoverable under that sub-paragraph, but they are otherwise subject to the same reasonableness test as service charges.

18. Again, given the intentions of the Government’s programme of leasehold reform, the policy driver for leaseholders’ new obligation to meet the legal fees of taking relevant building safety measures might be described as regressive.

The lease

 

19. A lease is a contract. It is the agreement between the parties to it about the rights and obligations governing the leaseholder’s occupation of property such as a flat or a house.

20. The clauses by which the parties promise to do or refrain from doing certain things are known as covenants. Clause 120 implies covenants into leases pursuant to which the landlord and the leaseholder will perform certain activities, including, on the leaseholders’ side, the payment of the building safety charge.

21. In a straightforward case, there will be two parties to the lease: the landlord, who is the person who is letting the property, and the leaseholder, the person taking the lease. "Leaseholder" can be used interchangeably with "lessee" and "tenant". There is no technical difference in meaning.

22. Increasingly, modern leases are tripartite: they include not only landlord and lessee, but also a third party, normally a company, that fulfills the management and service functions that would otherwise be performed by the landlord.

Situations where a landlord might incur legal costs

 

23. In relation to the building safety charge, the landlord is likely to incur legal costs:

a) In taking advice as to the recoverability of costs as a building safety charge;

b) In pre-action conduct relating to alleged failure to pay the charge;

c) In court proceedings;

d) In the First-tier Tribunal (Property Chamber) under paragraph 14 of Schedule 2, and/or,

e) In pursuing steps towards forfeiture.

24. By analogy with the current law of service charges and variable administration charges, it is highly likely that the landlord will look to the leaseholder(s) to pay those costs under the terms of their leases, whether as part of the building safety charge or otherwise.

Covenants to pay legal costs

 

25. A leaseholder may be required to contribute towards some legal costs as part of the general services provided under the lease, that is, as part of the service charge.

26. Others may be payable directly by the leaseholder who has effectively caused the landlord to incur those costs. Those costs are known technically as variable administration charges.

27. It does not follow however that a leaseholder is obliged to pay the landlord’s legal costs just because the landlord has incurred them. The lease must oblige the leaseholder to pay those costs, and each lease must be considered individually.

Legal costs as part of the service charge

 

28. It is important to bear in mind that the landlord may be entitled to recover its legal costs, even if the words "legal costs" do not actually appear among the services that the landlord is obliged or entitled to perform and for which the leaseholder is obliged to pay. It is a question of interpreting the words in the clause and the lease overall against the background known to the parties when the lease was granted.

29. Older leases tend to lack the clarity of modern leases so far as the recovery of legal costs is concerned.

Legal costs as variable administration charges

 

30. A lease is likely to contain clauses that oblige a leaseholder to pay for specific actions taken by a landlord, often in relation to that leaseholder individually such as enforcing the terms of the lease, or in considering whether to grant consents.

31. These clauses are likely to oblige the leaseholder to pay all of the landlord’s legal costs. Legal costs charged under those clauses are known technically as variable administration charges.

32. Some clauses will clearly set out the obligation to pay the landlord’s costs of enforcing the terms of the lease. It might be said that clauses that entitle the landlord to recover its legal costs of forfeiture are amongst those.

33. Typical forms of wording for forfeiture costs recovery clauses include covenants by the leaseholder:

To pay the Lessor all expenses (including Solicitors’ costs and Surveyors’ fees) incurred by the Lessor incidental to the preparation and service of a notice under Section 146 of the Law of Property Act 1925 notwithstanding forfeiture is avoided otherwise than by relief granted by the Court

or

To pay all expenses including solicitors costs a surveyors’ fees incurred by the Landlord incidental to the preparation & service of a notice under Section 146 of the Law of Property Act 1925 or incurred in contemplation of proceedings under Section 146 of the Act

34. Those clauses operate however to allow a landlord to recover its legal costs of proceedings that are not, on their face, connected with forfeiture.

35. In order to understand why, some knowledge of the law of forfeiture is needed.

Forfeiture

 

36. Most leases include a clause that entitles the landlord to forfeit the lease (also known as "re-entry") if the leaseholder is in breach of covenant.

37. Forfeiture is a draconian measure: if a lease is forfeit, it is extinguished, leaving the leaseholder with nothing. Indeed, if there is a mortgage secured on the property, forfeiture destroys the lender’s security, leaving the leaseholder with a significant debt to the lender.

38. For that reason, many landlords inform mortgage lenders of any alleged arrears or other breaches of covenant when they issue pre-action letters to leaseholders, knowing that the lender will be anxious to protect their security and will often pay any alleged arrears in order to do so.

39. The mortgage lender then adds that payment, along with any legal costs it has itself incurred, to the leaseholder’s mortgage, as it is generally entitled to do under the terms of the mortgage.

40. For the reasons set out below, landlords increasingly seek to rely on forfeiture clauses in leases in order to recover alleged arrears and associated legal costs from leaseholders.

Restrictions on the right to forfeit

 

41. Parliament has intervened on several occasions to try to reduce the likelihood of a landlord successfully forfeiting a long residential lease.

42. First, section 146 of the Law of Property Act 1925 prohibits a landlord from forfeiting a lease unless he has served on the leaseholder a notice (a "section 146 notice") detailing the leaseholder’s alleged breach(es) of covenant.

43. Next, section 81 of the Housing Act 1996 prohibits a landlord from serving a section 146 notice based on arrears of service charges unless there has been a determination of the amount of service charge that the leaseholder must pay, or the leaseholder has admitted that the service charge is payable.

44. Even in leases where the service charge is "reserved", i.e., payable, as rent, a landlord must obtain a "section 81 determination" before serving a section 146 notice (see the judgment Sir Andrew Morritt in the Court of Appeal in Freeholders of 69 Marina, St Leonards-on-Sea [2011] EWCA Civ 1258).

45. Thirdly, sections 168 and 169 of the Commonhold and Leasehold Reform Act 2002 prohibit a landlord from serving a section 146 notice based on breach of a covenant (apart from payment of service charge, which is covered by section 81 of the Housing Act 1996 above), unless there has been a determination that the leaseholder is indeed in breach of covenant, or the leaseholder has admitted that s/he is in breach of covenant.

46. For the sake of clarity, a landlord need only obtain a determination under either section 81, Housing Act 1996, or section 168, Commonhold and Leasehold Reform Act 2002, not both.

47. Given that the Building Safety Bill implies into leases a covenant to pay a building safety charge, it follows that a breach of that implied covenant will permit the landlord to consider forfeiture amongst the range of available enforcement options.

48. The Bill draws a distinction between service charges and building safety charges. By new section 18(2A), inserted into the 1985 Act by clause 120(4) of the Bill, where a cost falls within the meaning of both service charge and building safety charge, it is to be treated as a building safety charge.

49. That being the case, it seems that a landlord will be required to obtain a determination under section 168 of the 2002 Act as a prelude to forfeiture.

Summary

 

50. The result of all of the above is that, if a landlord considers that a leaseholder has breached the implied covenant to pay the building safety charge, and wishes to enforce the covenant through forfeiture, they will be required to:

a) Obtain a determination that there has been a breach of covenant or an admission from the leaseholder to that effect (section 168, Commonhold and Leasehold Reform Act 2002);

b) Serve on the leaseholder a section 146 notice;

c) Bring court proceedings for possession on the ground of forfeiture.

51. The purpose of the requirement to obtain a determination of breach before bringing proceedings for possession on the ground of forfeiture was presumably to give leaseholders the opportunity to dispute a landlord’s right to forfeit a lease at an early stage, and to protect them from the unexpected or abusive exercise of that right [2] .

The law of unintended consequences

 

52. In theory, the above fulfils Parliament’s purpose.

53. Significant issues have however arisen in relation to the legal costs of following the forfeiture procedure, the main effect of which has been to confer on landlords an all but unassailable position of strength in relation to the costs of litigation.

54. There is no reason to anticipate that the position will be different in relation to the building safety charge.

55. First, as set out above, there are likely to be contractual entitlements to legal costs in the lease that are enforceable in all jurisdictions including the First-tier Tribunal and the small claims track in the county court.

56. Secondly, given the "no/low costs" jurisdictions of the First-tier Tribunal and court claims worth under £10,000, a landlord or management company can be reasonably confident that, even if their litigation is unsuccessful, it is unlikely that there will be any costs order made in favour of the leaseholder.

57. From a practical perspective, it is worth noting that claims for arrears of service charge tend to be dealt with as debt claims, and cases tend to be dealt with trainees or paralegals with little to no technical knowledge or experience of what is a highly technical area of law.

58. That lack of knowledge and experience can manifest in serious errors. For example, in one of my cases, a third-party management company demanded over £50,000 in legal fees from a leaseholder. It sought to rely on a forfeiture costs recovery clause, even though, as a third-party management company rather than the landlord, it had no right to forfeit the lease.

59. Again, there is no reason to suppose that the position will be any different in relation to the building safety charge.

First-tier Tribunal (Property Chamber) applications

 

60. It is often said that the First-tier Tribunal is a "no costs" jurisdiction.

61. Whilst that means that the First-tier Tribunal has no power to order one side to pay the other’s costs (save where a party is found to have crossed the high threshold of having behaved unreasonably), it does not mean that legal costs in proceedings in the First-tier Tribunal cannot be recovered from the leaseholder by the landlord under a forfeiture costs recovery clause.

62. As a result of the 69 Marina case, landlords routinely rely on section 146 clauses to charge leaseholders the legal costs that they incur in the First-tier Tribunal or in court.

County court claims

 

63. In contrast to the First-tier Tribunal, under section 51 of the Senior Courts Act 1981, the county court has the power to order one party to pay the other’s legal costs of the claim, subject to the Civil Procedure Rules 1998 (the "CPR").

64. CPR rule 27.14 provides that in a small claim, ie, one in which the amount at stake is less than £10,000, the court "may not order a party to pay a sum to another party in respect of that other party's costs, fees and expenses" except for certain, limited costs.

65. However, in Chaplair Ltd v Kumari [2015] EWCA Civ 798, the Court of Appeal decided that where landlords bring county court claims for non-payment of service charges, they are also entitled to rely on section 146 clauses in leases, even if the amount that is claimed falls under the small claims threshold.

66. The two case studies that follow evidence the effect of that decision.

Case study 1

The landlord issues a claim for building safety charge arrears of £2,000.

The leaseholder defends the claim.

The court finds that £1,500 is payable and enters judgment for that amount.

The landlord claims legal costs of £9,500. The court reduces the amount to £3,000. The leaseholder is therefore liable to pay £4,500 in building safety charges and costs.

The landlord puts the balance of its costs through the service charge, resulting in a £200 increase in the service charge payable by each leaseholder in the block. There is no Recognised Tenants’ Association, and few leaseholders are owner occupiers, so no one challenges the increase because no one wants to challenge their individual £200 liability: the application fee to the First-tier Tribunal itself is £150.

Case study 2

The landlord issues a court claim for building safety charge arrears of £2,000.

The leaseholder defends the claim.

The court finds that £1,500 is payable and enters judgment for that amount. The landlord claims – and is awarded – its costs of £9,500.

The leaseholder is therefore liable to pay a total amount of £11,000.

Case study 3

The landlord issues a court claim for building safety charge arrears of £2,000.

The leaseholder defends the claim, which is transferred to the First-tier Tribunal for a determination of the amount payable.

The Tribunal finds that £1,500 is payable.

A month later, the landlord sends a demand for its legal costs of £9,500 to the leaseholder.

The leaseholder is therefore liable to pay a total amount of £11,000.

In order to challenge the demand for legal costs, the leaseholder must apply to the Tribunal for a determination of the reasonableness of those costs. If the leaseholder does not pay the demand before applying to the Tribunal, the landlord may be entitled to claim the legal costs of the leaseholder’s application about costs from that leaseholder.

And so on.

Statutory controls of costs

67. There is some statutory regulation of contractual entitlements to legal costs, depending on the nature of the charge:

a) In court and in the First-tier Tribunal (Property Chamber): sections 19 and 20C of the 1985 Act, and paragraphs 5 and 5A of Schedule 11 to the Commonhold and Leasehold Reform Act 2002;

b) In court: the Civil Procedure Rules 1998.

68. Paragraphs 10 and 14 of the new Schedule 2 to the 1985 Act, contained in Schedule 7 to the Bill, propose to include similar controls to limit the legal costs that may be charged to the building safety charge.

69. All of those controls require litigation in order to be applied.

70. In short, in litigation about service and administration charges, the landlord’s worst outcome – that they pay their own costs but the not the leaseholder’s – is often the leaseholder’s best, and the same appears to be true in relation to the building safety charge.

71. In practical terms therefore, the leaseholder’s ability to challenge the building safety charge in a meaningful way is, at best, compromised:

a) If they can afford legal advice, they have little to no prospect of recovering those legal costs if the claim is allocated to the small claims track or is heard by the Tribunal;

b) They therefore face the real risk that any success that they might enjoy will be rendered nugatory by the cost of the proceedings;

c) Equally, they face the risk that the landlord will seek to recover its legal costs from them, either by way of service charge; variable administration charge or building safety charge.

Conclusion

 

72. I acknowledge that this submission addresses one, niche area of difficulty with the Bill. Organisations such as the End Our Cladding Scandal campaign group, the Leasehold Knowledge Partnership and the National Leasehold Campaign speak more directly to the building safety crisis; to the problems connected with leasehold more generally and to the Bill’s failure to provide a practical route to remediation of defective buildings.

73. To those voices I add my professional view that assimilation of the current law of service charges into the Bill is equally unfortunate. If there is reform to the law of service and administration charges, those elements of the Bill that incorporate the current law will require amendment as soon as – if not before – the Bill comes into force. If they remain unamended, they may conflict with the reforms and will be an unwelcome reminder of statutes that were replaced for want of balance.

74. In this final paragraph, I return to the specific issue tackled in this submission. Amendments to the Bill are badly needed to counter the effects of the Court of Appeal’s judgments in Freeholders of 69 Marina and Chaplair Ltd v Kumari, so as to recalibrate landlord and leaseholder costs entitlements. In the interests of access to justice, one party should not be required to run the risk of paying the other’s costs with no prospect of recovering their own.

Monday 23rd August 2021.