The practical impact of the Building Safety Act 2022 on the recovery of service charges for remediation costs is beginning to be felt across the real estate sector, with it becoming increasingly apparent that the new obligations are even more extensive than first anticipated, leaving landlords and leaseholders alike scrambling to ensure that they are compliant.
Landlord's Certificates – the paperwork problem
Under the Building Safety (Leaseholder Protections) (England) Regulations 2022 (the Regulations), the Landlord's Certificate is intended to create a snapshot of the position of the building as at the qualifying time of 14 February 2022. The Certificate should capture all details needed to enable leaseholders to understand the extent to which, if at all, they will be required to contribute via service charge to the costs of the remediation of relevant defects in relevant buildings i.e., those of at least 11 metres in height or five storeys, containing at least two flats.
Under the Regulations, it is the current landlord who must provide the Certificate, enclosing an exceptionally detailed and comprehensive volume of supporting evidence. This includes company accounts for each company in the landlord's group, a statement from a chartered accountant or the landlord's finance director setting out the net worth of the landlord's group, details of relevant works carried out since 28 June 2017, and details of any costs paid or due to be paid towards those works, concluding with a statement of the leaseholder's maximum remaining liability. Where there is a superior landlord holding relevant information, the Regulations contain provisions for the current landlord to request information from that superior landlord, who must respond within three weeks of request.
If the landlord is part of a large group and there are superior landlords involved, the scale of the challenge cannot be underestimated, with potentially hundreds of documents required to be served on the leaseholder along with the certificate. With many landlords having now signed up to the Government's Developer Pledge and self-remediation terms (or owning a building which was constructed by a developer who has signed up to such terms), the purpose and utility of the Landlord's Certificate may be open to question – why go through the time and cost of preparing the Landlord's Certificate if the developer is going to pay for the remediation costs anyway?
However, given the breadth of the scope of relevant costs which are caught by the leaseholder protection provisions under the Building Safety Act (going well beyond replacement of cladding), it is still a material risk for a landlord to decide not to provide a Landlord's Certificate when requested to do so, as the landlord will then be prevented from recovering any remediation costs from the particular leaseholder who has requested the Landlord's Certificate.
Landlords therefore face a substantial obligation to gather together large amounts of documentary evidence and paperwork in order to be able to complete the Certificate, even if they do not currently intend to recover any remediation costs from the particular leaseholder.
Mortgage lender requirements
Not only is there a significant obligation on landlords, but buying a flat has become increasingly complicated due to recently introduced changes to the conveyancing process. In January 2023, the Law Society updated its standard leasehold enquiries forms TA7 and LPE1, to each include additional enquiries to sellers and landlords (respectively) as to whether a Landlord's Certificate or a Leaseholder Deed of Certificate has been issued.
Likewise, the UK Finance Mortgage Lenders' Handbook has been updated to include requirements on conveyancers to raise enquiries in respect of building safety on all leasehold transactions, regardless of whether the flat being purchased is situated within a relevant building to which the leaseholder protection provisions apply. Certain lenders also require conveyancers to verify information in Landlord's Certificates and Leaseholder Deeds of Certificate.
All this has led to much confusion in the residential conveyancing sector, with many leasehold sales stalling when Landlord's Certificates are not forthcoming. As with the EWS1 form difficulties, it appears that a measure that was introduced to improve the position of leaseholders may in fact cause detriment to them by slowing down the conveyancing process.
The lease extension loophole
The Building Safety Act is clear that in order to qualify for various leaseholder protections, the relevant lease must have been granted before the qualifying time of 14 February 2022.
However, whenever a lease is extended (whether through the statutory rights contained in the Leasehold Reform, Housing and Urban Development Act 1993 or by agreement with the landlord), this operates as a surrender and re-grant of the lease. So on the face of it, any lease extended and therefore "re-granted" after 14 February 2022 did not exist at the qualifying time and would therefore lose the protections under the Building Safety Act.
It is very unlikely that this would have been an intended consequence of the legislation, but it does appear to be an unexpected loophole, enabling landlords to recover remediation costs from leaseholders who unavoidably need to extend their leases.
Further amendments required?
In February 2023 the Government amended the Regulations to fix a mistake in the original drafting of them, which had unwittingly robbed the definition of "landlord's group" of most of its meaning. It was this amendment that has now caused significant practical difficulties for large landlord groups, given the enormous volumes of paperwork and company accounts now required to be enclosed with the Landlord's Certificate.
The lack of legislative scrutiny afforded to the Regulations is becoming increasingly apparent in its application, whereas the current state of play with the Developer Pledge and self-remediation terms seems to have changed the game for many leaseholders for the better since the Building Safety Act was enacted. It therefore remains to be seen whether further Government amendments to the Regulations will be made.
Given the mounting conveyancing delays and the mountains of paperwork required to produce a Landlord's Certificate, the present situation appears dissatisfactory for landlords and leaseholders alike and a further revision of the Regulations to introduce a more proportionate system would seem sensible.
