Building Safety Bill

Joint written evidence submitted by U.K. Cladding Action Group (UKCAG) and End Our Cladding Scandal (EOCS) (BSB15)

Joint Submission to the Building Safety Bill Public Bill Committee

1. Executive Summary

1.1. This is the joint submission of the U.K. Cladding Action Group ("UKCAG") and End Our Cladding Scandal ("EOCS") to the Public Bill Committee considering the Building Safety Bill (the "Bill"). UKCAG and EOCS are two volunteer resident-led campaign groups representing hundreds of thousands of leaseholders affected by building and fire safety issues arising since the Grenfell Tower fire in June 2017. [1]

1.2. The Bill is not fit for purpose. The Bill follows over four years of broken promises, made by the government since the Grenfell Tower catastrophe, that steps to protect leaseholders were just around the corner. That promise remains unfulfilled. The Bill now holds out the prospect that more and worse is coming for current leaseholders already facing ruinous costs. The Bill makes it certain that leaseholders will bear the costs for both past and current regulatory and industry failures, as well as all such future failings. Both current and future leaseholders face a future in which only one thing is certain: large, uncapped, unending costs for administering the vast and hugely complicated new regime being established by this Bill.

1.3. It is also troubling that, even after the horrors of Grenfell and the ensuing financial misery for millions of leaseholders, the government is not taking the opportunity in the Bill to address the twin root causes of the current crisis. The first is the flawed leasehold system itself. The Bill replicates all the inadequacies of the existing control of service charge machinery, compounding its faults by creating a new Building Safety Charge. The second is poor regulations made behind closed doors in close consultation with vested interests and with no proper system of oversight. Parliament is being asked to pass this Bill while crucial aspects of detail are worked on behind closed doors with industry representatives leading policymakers to their preferred outcomes. The cycle is already repeating.

1.4. There are some good aspects to the Bill. The focus on centralised building control approval for higher-risk buildings is welcomed. The mandatory creation and keeping of building safety records during planning and construction up to point of handover to first residents is welcomed. The introduction of a new building product safety framework is welcomed. Improved regulation of the architectural profession is also welcomed.

1.5. The good aspects are mere afterthoughts compared to the damage that will be done by the bad parts of the Bill. The new occupation regime for higher-risk buildings is better suited to a sophisticated petrochemical plant than it is to residential occupation. It will require, for the first time, a dedicated building safety manager to oversee an intricate and expensive safety regime. There is a clear moral hazard between the roles of the accountable person and the building safety manager, who will have significant power without any real accountability to leaseholders paying the bills. Leaseholders are in danger of becoming cash dispensers legally obliged to underwrite every change in building safety fashion, now and forever.

1.6. This moral hazard is not mitigated, as it should be, by including in the Bill an overriding statutory provision requiring value for leaseholders’ money to be considered by reference to objective evidence before taking any actions in the name of building safety. The same is true of the failure to adopt a bespoke regime to cater for existing buildings that will be caught by the new regime despite being built under a regime the government is implicitly condemning by sweeping it away with the reforms made by this Bill.

1.7. The rest of this paper is divided into three sections. Section Two identifies the key flaws in the Bill. Section Three considers how the Bill could be improved, principally by passing the latest McPartland-Smith amendments. Section Four summarises the wider public policy context (and failure) in which the Bill falls to be assessed by Parliament.

1.8. The bottom line is that is the people who will end up paying for this Bill – leaseholders – need to be protected by a comprehensive package of amendments before the Bill becomes law.

2. Key flaws in the current Bill

2.1. The key flaws in the current Bill are summarised as follows:

2.1.1. The Bill is predicated on a false premise that new and more complex regulation will improve safety. The Bill ignores the fact that Grenfell and other fires have been caused not by a lack of regulation, but by a failure to enforce existing regulation. That should have been attempted before producing this new and enormously complex legislation;

2.1.2. There is no express overriding statutory requirement of proportionality and value for leaseholder money in the Bill weighed against objective evidence of risk to life before incurring expenditure or requiring works. All the Bill refers to is a set of non-binding principles, which we are yet to see. [2] Building safety is in danger of becoming a sacred cow on which any expense can, and will, be incurred;

2.1.3. The Bill makes it certain that leaseholders are always and everywhere responsible for the costs of remediating any defect that leads to a "building safety risk". The Bill amends current and future leases to empower the recovery of costs of all "works" required to address such risks, with the costs of such works inevitably being recoverable through existing service charge machinery; [3]

2.1.4. Whilst the burden on leaseholders is made crystal clear in the statutory language of the Bill, there is no corresponding requirement on builders to build in a way that avoids any building safety risk, or even in accordance with approved plans. Nothing is done to make building control and other professionals involved in construction directly liable to residents for a failure to comply with the new (or existing) regulatory system. It all comes down to the quality of enforcement by the new Building Safety Regulator which, if it is as lacking as recent years may well be inadequate;

2.1.5. The extended limitation periods for claims under the Defective Premises Act 1972 and a new claim under section 38 of the Building Act 1984 are welcome but are toothless without the backing of mandatory insurance. Builders routinely wind-up subsidiaries shortly after completing buildings, which often means that there is no solvent party to sue for damages. Litigation under the Defective Premises Act is notoriously complicated and expensive. We have yet to see the statutory instrument setting out the precise cause of action under section 38 of the Building Act 1984. The government also appears to be trying to give a "get of jail free card" to developers affected by the retrospectively extended limitation periods. it is not the solution that leaseholders need or deserve. To add insult to our ongoing injury, the Ministry of Housing, Communities and Local Government ("MHCLG") acknowledged, to the National Audit Office in its June 2020 report, that only in a minority of cases would it be financially justifiable for building owners to bring legal action to recover money and that legal costs of taking action were likely to outweigh the costs for remediation works in a significant number of cases with a clear impact to pace of remediation. [4] On 24 February 2021, Kit Malthouse told Parliament that the Fire Safety Bill was "not the correct place for (historic) remediation costs to be addressed" and that the "Building Safety Bill is the appropriate legislative mechanism for addressing these issues" and that it would "contain the detailed and complex legislation that is needed to address remediation costs". On 18 March 2021, Building Safety Minister, Lord Stephen Greenhalgh, wrote to peers, during the Fire Safety Bill legislative process, to tell them that the Building Safety Bill would be "correct legislative approach" to prevent leaseholders from remediation costs. However, on 7 July 2021, Lord Greenhalgh told the Local Government Association annual conference that he recognised leaseholders were still facing very, very big bills "but it’s not really the Building Safety Bill that can resolve some of those points" [5] – this volte-face is nothing short of a betrayal and breaks the promises made by Ministers and MPs. Unfortunately, it is clear this proposed legislation will do little to help innocent leaseholders currently facing enormous costs due to the collective state and industry failure to construct safe buildings;

2.1.6. There is a moral hazard between the accountable person and the building safety manager on the one hand and leaseholders on the other. The two officials can spend leaseholder money on works and through the Building Safety Charge without any effective control, all in the name of building safety. Risk-aversion (possibly simple greed) may lead to all manner of unnecessary spending, as is already being seen in response to the government’s Advice Notes;

2.1.7. The legal definition of "higher-risk building" can be changed at any time in the future with only minimal consultation between the government and bodies appointed by the government. The misconceived fixation on height as a proxy for risk means there is a danger that a building of any height could be dragged into the onerous new occupation regime set out in Part 4 of the Bill. [6] This is especially concerning given the Ministry’s consultations on Risk Prioritisation in Existing Buildings [7] and the Review of the ban on the use of combustible materials in and on the external walls of buildings [8] both closed over a year ago with the government yet to publish any response.

2.1.8. Analysis from April 2021 shows that three-quarters of cladding systems on new medium-rise buildings are still being constructed using combustible materials [9] hence any future revision in the legal definition of "higher-risk building" will only lead to this living nightmare perpetuating for decades. The reliance on the forthcoming PAS9980 as a magic bullet that will provide objective certainty on fire risk assessment of external wall construction and cladding is misconceived – it is incumbent on the government to ensure there is a sophisticated, holistic risk matrix to fully assess all internal and external fire safety defects in buildings of all heights now before the Building Safety Bill moves through the legislative process. [10]

2.1.9. There is no requirement to establish a bespoke regime for existing buildings that, on the government’s case, were constructed under a flawed system of regulation and may require extensive works to meet new standards, however small the risk to life;

2.1.10. The Building Safety Charge is not required to run on the same timetable as existing service charge arrangements, potentially leading to different service charge demands on different dates, increasing costs for leaseholders. [11] Building Safety Charges may be held together with other service charge money. In the case of mixed height developments, there is no express restriction on using non-higher-risk building leaseholders’ money to pay for shortfalls in higher-risk building leaseholders’ contributions; [12]

2.1.11. The Building Safety Charge adds complexity to already dysfunctional control of service charge machinery in Landlord and Tenant law. One example of this is the continuation of antiquated, paper-based, limited information rights as found in existing law. The government appears to be overly reliant on the supposed protection of consultation requirements within existing Landlord and Tenant law; however, in its response to the Commons Housing, Communities and Local Government Select Committee’s Scrutiny of the draft Building Safety Bill [13] , the government has acknowledged that landlords are able to apply to the First Tier Tribunal for dispensation. These dispensation applications are granted as a matter of routine. We expect to see a heavy reliance on "building safety" as a reason for seeking to avoid consulting leaseholders on bills they will be forced to pay;

2.1.12. The Bill and the recently passed Fire Safety Act 2021 may contradict each other. It is possible that in some buildings the accountable person for building safety issues may be different to the responsible person for fire safety issues. We do not know how the two statutory regimes will interact, beyond the fact that leaseholders will end up picking up the increased costs whenever and wherever the duty of cooperation between the two officials breaks down;

2.1.13. Too much of the legislative detail is being left to statutory instrument. This secondary legislation will inevitably be developed behind closed doors in close consultation with vested interests, as is already happening in at least one case. Put bluntly, the government has demonstrated with its Advice Notes that it cannot be trusted to develop sensible advice behind closed doors. Clause 142 of the Bill also appears to be a Henry VIII power that will allow amendments to other Acts of Parliament to be made by regulation. Parliament is being asked to give the government an undated cheque, if not a blank cheque; and

2.1.14. The Bill does not provide adequate protection for private property rights of leaseholders. Clauses 95 to 97 give broad powers to an accountable person to enter and interfere in the leaseholder’s property. This is contrary to the principle of quiet enjoyment contained in every lease. There is no adequate protection against overzealous accountable persons abusing these powers.

3. How to improve the Bill

3.1. Many of the issues with the Bill identified above can be addressed easily by adopting the McPartland-Smith amendments. These amendments serve the following purposes:

3.1.1. Creating clear accountability for future builders by importing existing consumer rights protection into housing law and backing those rights with compulsory insurance for at least 25 years;

3.1.2. Two practical financing schemes for addressing current and future building safety issues. The first adapts the existing scheme under Part 16 of the Housing Act 1985. This scheme was first used by the Thatcher government in the 1980’s to provide taxpayer funds to cover costs incurred by private homeowners who had to rebuild the external walls of pre-cast reinforced concrete houses. The second scheme creates something akin to the Motor Insurers’ Bureau – the Building Safety Indemnity Scheme – which would create a pot of money to cover current and future building safety costs caused by regulatory and industry failure, financed by levies on builders, mortgage lenders, insurance companies and building product suppliers; and

3.1.3. Ensuring leaseholders are protected from the unfair imposition of Value Added Tax ("VAT") on fire safety remediation works in future with a right to claim refunds on VAT paid since the tragic events at Grenfell Tower in June 2017. HMRC has stated that it recognises the health and safety concerns and has moved to exceptionally permit affected buildings to be treated as incomplete and, hence, for zero-rating to apply; however, it has only chosen to allow this where the property is still owned by a person involved with the original construction and where the persons organising the remedial works have person constructing status. It is a simple point of fairness that these same rules are allowed to be applied to the benefit of leaseholders.

3.2. Other potentially valuable reforms include the following:

3.2.1. Introducing an express, overriding requirement of proportionality into the Bill requiring a cool assessment of objective evidence of risks weighed against costs that overrides all other considerations;

3.2.2. Adopting a bespoke regime, backed by public funding where appropriate, for existing higher-risk buildings facing expensive works to meet the Bill’s new standards;

3.2.3. Imposing a statutory code of practice, backed by offences, setting out objective standards against which accountable persons’ use of clauses 95-97 of the Bill should be used. The code of practice should make clear that education is the first resort and using the powers of entry is a last resort; and

3.2.4. Introducing stronger, digital information rights for leaseholders to see details of both Building Safety Charge expenditure and service charge expenditure. Building owners should be required to provide online databases so leaseholders can see where their money is going in real-time. The consultation process for major works should be overhauled to reduce the ability to apply for dispensation from consultation and to greatly improve the extent and quality of information provided to leaseholders about the necessity and cost of the works.

4. The wider public policy context

4.1. On 17 May 2018, James Brokenshire, then Secretary of State for Housing, Communities and Local Government, stated that the government agreed with Dame Judith Hackitt’s conclusion that "the current system – developed over many years and successive governments – is not fit for purpose." [14] However, the government is choosing to press ahead with this legislation despite not having addressed the full ramifications of Grenfell and the ensuing building safety crisis - these ramifications have arisen solely as a result of decades of failure to enforce existing building regulations, as also acknowledged by Mr. Brokenshire, on behalf of the government, in 2018.

4.2. This failure has been compounded by MHCLG’s own botched, piecemeal interventions in the form of Advice Notes and guidance on temporary fire safety measures, such as Waking Watches. [15]

4.3. These serious public policy failures have been compounded by a misplaced reliance on market forces to assess the scale of the intervention required by the Advice Notes and to oversee remediation work. Those market forces have done nothing except turn the crisis into a means of lining their own pockets at leaseholders’ expense, by increasing building insurance prices hundreds of percent, producing EWS-1 reports without the appropriate qualifications and by generally charging leaseholders for work. [16] [17] A far more cost effective approach would have been for the state to take the lead on imposing an objective system of identification and assessment, as has already happened in the Australian states of Victoria and New South Wales.

4.4. The government has yet to address the financial consequences of its Advice Notes. Such consequences are already starting to be felt by large mortgage lenders, who – in an apparent echo of the sub-prime crisis of 2008-9 – are already having to make bad debt provisions over and above that predicted by their valuation models, recent examples of which are as follows:

4.4.1. Lloyds Banking Group, the UK’s largest mortgage lender, increased its out-of-model adjustment for mortgages impaired by cladding remediation costs from £51 million at 31 December 2020 to £105 million by 31 July 2021, and; [18]

4.4.2. Nationwide, the UK’s second largest mortgage lender, states in its 2021 accounts that it believes "current government funding available is anticipated to be below the amount required to remediate such properties, and the desirability of the properties is expected to be severely affected for several years." Nationwide adjusted its most recent mortgage valuation model by £23 million to account for this risk; [19]

4.5. There is currently up to £5.1 billion on offer through the Building Safety Fund to address cladding on buildings above 18 metres tall. The Commons Housing, Communities and Local Government Select Committee believes at least £15 billion is required. [20] Of the £5.1 billion available, only £578 million has been allocated by 31 July 2021 and only £109 million expended as at 30 June 2021, despite the government’s initial deadline of work starting on site of 31 March 2021. [21] Despite telling the Public Accounts Committee, on 6 July 2020, that lessons had been learned from the onerous requirements of the ACM Fund application process, [22] the government has again underestimated the scale of this crisis and has now implicitly acknowledged that the revised deadline of the end of September 2021 will still not be met in many cases.

4.6. The government has yet to produce a penny piece to address cladding issues in buildings 11-18 metres tall. It promised in February 2021 a loan scheme capped at £50 per flat per month. Details were promised in the March 2021 Budget, [23] but no further details were announced then, or since. The loan scheme is unworkable in practice. It will require the government to establish a bureaucracy to administer many tens of thousands of such loans, the costs of which will have to be met from the capped repayments. Simple arithmetic shows that £50 per month will only repay a debt of £40,000 at 1.5% interest after 320 years, longer than some leases. A higher loan principal or a higher interest rate will mean such a loan is never repaid. There is no space in the housing market for creation of perpetual securities of this nature.

4.7. Any loan scheme will have catastrophic consequences for the market in flats. Such loans will inevitably depress prices and make selling more difficult. The effects will be felt disproportionately by leaseholders in the Midlands and the North, where property values are lower, risking pushing leaseholders in lower-value areas into negative equity. [24] Wherever a property is located, if people cannot sell flats and move up to larger houses this will reduce demand, and therefore prices, for houses normally bought by people selling flats. These effects have already begun, with sales of flats halving in September 2020, meaning a loss of transaction value of £1.6 billion [25] - this will eventually propagate throughout the entire housing market.

4.8. Finally, the loan scheme is unworkable in any case where the freeholder has to borrow the money and the freehold is subject to a secured loan containing a negative pledge. [26] Such arrangements will preclude securing any new borrowing. The terms of loans secured against the freehold, such as loan-to-value ratios and restrictions on borrowing other than in the ordinary course of business may also prevent freeholders undertaking further borrowing.

4.9. Nor has the government yet produced any money to address cladding issues in buildings under 11 metres tall, or money to address non-cladding issues in buildings of any height. The government fails to understand that unless all of the money is made available to fix every issue in every building, no issue in any building will be fixed.

4.10. As mentioned above, MHCLG is continuing the same failed approach of asking industry representatives to make the detailed rules regarding building safety. One of the most visible examples of this is that the Building Safety Alliance ("BSA") has already been tasked by the MHCLG with producing a model set of qualifications and functions to be performed by the Building Safety Managers created by the Bill. The BSA contains not a single leaseholder or resident representative. The people who will eventually pay for the BSA’s decisions are not being given a seat at the table. No amount of resident voice at building level will overcome that industry influence over the system as a whole. This is just as the MHCLG and BSA appear to intend. It is a racing certainty that many of the other detailed regulations required to bring the Bill to life will also be the product of this same regulatory capture, shepherded by the MHCLG far from Parliamentary oversight.

4.11. We already know that building safety works are often gold-plated and commissioned without proper evidence, or for ulterior purposes. [27] Buildings have been put forward to the Building Safety Fund purely to improve their already satisfactory EWS-1 ratings. [28] Others have had work done at huge mark-ups, 16 times the initial cost in one case. [29]

4.12. The government’s own estimates of the cost of the new regulatory regime being created by the Bill have already been dismissed publicly as being too low by the people charged with implementing the regime. The government’s impact assessment estimated the cost of the new occupation regime imposed by the Bill at £16 per flat per year. [30] Press reports are already quoting trade bodies and landlords saying that there will be an average £500 to £600 per flat per year in extra service charges because of the Bill and the Fire Safety Act 2021. [31]

4.13. In truth, because the Bill does not impose any effective requirement of proportionality or means for leaseholders to stop spending before it happens, the actual costs they face will be uncapped. The costs will be determined by two interactions far removed from the people living in buildings. The first will be the approach taken by the new Building Safety Regulator. The second will be the accountable person’s and Building Safety Manager’s interpretation of these new rules. As explained above, these officials have great power with little responsibility. They can be as risk adverse as they like because they will know they are not spending their own money. Neither of these two interactions involves any meaningful consultation with the end bill payer: the leaseholder resident.

4.14. The cladding and building safety crisis has shown that there is a culture of secrecy at the heart of the leasehold system. Freeholders, including those in the social housing sector, and their managing agents routinely withhold information about building safety from residents, sometimes based on spurious assertions of legal privilege, but often simply by ignoring residents’ questions. This is done because they know there are no effective information rights for leaseholders in current leasehold law. The Building Safety Charge does nothing to address that information imbalance.

5. Conclusion

5.1. We urge Parliament to pass the McPartland-Smith amendments to the Bill. That will at least begin to redress the balance in favour of leaseholders and finally corroborate the warm words spoken by successive Prime Ministers and Ministers in the years since the Grenfell Tower catastrophe.

5.2. We also urge the government to take steps to address the other steps suggested above. Despite years of pleading by the government, it is apparent that building owners and developers are not doing the right thing and will generally refuse to do so unless legally interested in a building – it is now down to this government to evidence that it knows the right, moral and fair thing to do to protect leaseholders from all costs to remediate defects for which they are not responsible. Anything less continues to an unacceptable abdication of responsibility.

Liam Spender Sophie Bichener, Alex Dickin, Jake Ellis, Rebecca Fairclough, Julie Fraser, Jenni Garratt, Giles Grover, Lucie Gutfreund, Jim Illingworth, Natasha Letchford

Giles Grover Will Martin, Carine Marzin, Cerys Owens, Emily Pinchard, Jenny Reid, Dave Richards, Rituparna Saha, Paula Shalloo, Abigail Tubienė

Joint Submission of the U.K. Cladding Action Group and End Our Cladding Scandal

6 September 2021