On 1 September 2021, Fixflo ran the latest in a series of quarterly legal compliance update webinars with solicitor Cassandra Zanelli, CEO of Property Management Legal Services to discuss the latest legal and regulatory happenings block managers should be aware of. Here, Cassandra summarises what was discussed in the webinar.
DISCLAIMER: This blog is intended for information purposes only and does not constitute legal advice. If you have any questions related to issues in this ebook, we strongly advise contacting a legal professional.
Section 20B: Case update
What do managing agents need to know about the West India Quay v ETAL case?
There is a raft of contractual restrictions on the recovery of service charges. These are lease specific, and will therefore vary from lease to lease. To understand the contractual restrictions, you will need to read, understand and implement what’s in your leases.
In addition to the contractual restrictions, there is also a raft of statutory restrictions on the recovery of service charges. These include identification of landlord on a service charge demand (sections 47 and 48 Landlord and Tenant Act 1987), the requirement for demands to be accompanied by a summary of rights and obligations (section 21B LTA 19875), section 20 re: qualifying works and qualifying long term agreements (section 20 LTA 1985), reasonableness (section 19 LTA 1985) and the so-called 18-month rule (section 20B LTA 1985).
The Courts and Tribunals are littered with cautionary tales where landlords (which for these purposes includes the party who is entitled to enforce payment of a service charge) have failed to comply with the contractual and statutory restrictions. In some instances, those incidents of non-compliance can be rectified; the effect is suspensory in terms of non-payment. In other instances, non-compliance is fatal to the recovery of those service charges.
Section 20B is one of those instances where non-compliance is fatal to the recovery. If you do not comply with Section 20B, then service charges become “stale” and stale service charges are unrecoverable.
The issues of Section 20B were considered most recently by the Court of Appeal in No.1 West India Quay (Residential) Ltd v East Tower Apartments Ltd.
Section 20B: A reminder
Section 20B imposes a statutory time limit on making demands for service charges. It operates so as to impose a strict time limit of 18 months, which begins to run from the date on which the costs are incurred. If more than 18 months elapse before a demand for service charges is served, the leaseholder will not be liable to pay those costs.
There is an exception to this under section 20B(2) which enables any landlord to serve a section 20B(2) notice, which essentially puts a lessee on notice that costs have been incurred and that the lessee will subsequently be required under the terms of their lease to contribute to them by means of payment of a service charge. The section 20B(2) notice has to be given within the same 18 month period.
So, in order to recover costs and not fall foul of the 18-month rule, a landlord either has to serve a demand for payment of service charges within 18 months of incurring the costs or serve a section 20B(2) notice.
This prevents lessees from the problem of finding themselves faced with unexpected bills.
Questions considered by the Court of Appeal
It’s a lengthy decision, which goes into detail probably beyond the scope of this note, but one of the main issues was: Does there need to be a contractually valid demand?
In other words, must a demand for payment of the service charge comply with the service charge provisions of the lease? Must it follow the relevant contractual machinery contained in the lease?
This case concerned Switch2 standing charges, which had not been demanded from the lessees under the service charge provisions contained in the leases; they’d been demanded under the covenant to pay outgoings.
Back in 2016, the Upper Tribunal determined that such demands were invalid. The sums should have been demanded as part of the service charge, but that didn’t happen, let alone within 18 months after the standing charges were incurred. There was a reallocation of these standing charges to the service charges in 2016, but that was not accompanied by the making of any fresh demand for them in accordance with the service charge machinery in the leases, and in any event, the 18 month period had, by then, long since expired.
The Court of Appeal had “little hesitation” in concluding that a demand for the purposes of section 20B(1) must be a contractually valid demand which is served in accordance with the service charge provisions of the lease.
This case serves as a reminder of the importance of reading, understanding and implementing the terms of the leases, and in particular (for present proposes) following the service charge machinery set down in those leases.
Failure to do so could well be fatal to the recovery of those charges.
The main message to take from this is to read, understand and implement your leases!
Building Safety Bill
What do managing agents need to know about the Building Safety Bill?
The draft Building Safety Bill was published in July 2020.
The Bill itself was introduced to Parliament on 5 July 2021. The government stated that the Bill would “create lasting generational change and set out a clear pathway for the future on how residential buildings should be constructed and maintained”
Warning: This is only a brief overview of the Bill. There is a lot to it, and it’s impossible to cover it all here. We recommend you book yourself onto a course, read about it and stay up to date. The Bill is divided into sections and we will look at the ones most relevant.
What is a higher-risk building?
The Bill’s building safety regime imposes a more onerous regime on “higher-risk buildings” during their design and construction, and during their occupation.
Clause 62 of the Bill defines higher-risk buildings for the purposes of Part 4 of the Bill (which is concerned with buildings when they are occupied and creates the role of accountable person and building safety manager). It defines a higher-risk building as:
”...a building in England that—
(a) is at least 18 metres in height or has at least 7 storeys, and
(b) contains at least 2 residential units.” (Clause 62(1), Bill.)
Building Safety Regulator
Clause 2 of the Bill establishes the Health and Safety Executive (HSE) as the Building Safety Regulator (BSR) so that, in practice, the BSR will operate as a division of the HSE.
The BSR’s role involves:
- Implementing the new, more stringent regulatory regime for higher-risk buildings.
- Overseeing the safety and performance of all buildings.
- Assisting and encouraging competence among the built environment industry, and registered building inspectors.
The BSR can enforce obligations under the Bill by:
- Exercising existing powers under sections 35 and 36 of the Building Act 1984 in relation to non-compliance with Building Regulations.
- Exercising new powers to prosecute all offences under the Bill and the BA 1984, including section 35. Notably, for all offences under the BA 1984 and the Bill, if the offence is committed by a corporate body with the consent or connivance of a director, manager or other similar individual (or is attributable to their neglect), that individual may be prosecuted as well as the corporate body.
- Issuing a:
- compliance notice (requiring an issue to be remedied by a set date); and
- stop notice (requiring work during the design and construction phase to stop until non-compliance is remedied).
NB: Failure to obey a compliance or stop notice will be a criminal offence, with a maximum penalty of up to two years in prison and an unlimited fine.
- Exercising powers of entry to gather evidence for compliance action.
- Replacing an Accountable Person with a Special Measures Manager if there are serious failures endangering the life safety of residents in the building.
Higher-risk buildings during occupation
The Bill’s provisions for higher-risk buildings during their occupation centre around two new roles:
- Accountable Person
- Building Safety Manager
In addition, the Bill imposes new obligations on residents.
Paragraphs 55 to 73 of the explanatory notes cover the Bill’s regime for buildings during the occupation. Have a read!
The dutyholder regime that applies during the design and construction of a higher-risk building continues throughout its occupation. The dutyholder during occupation is known as the Accountable Person. They may be an individual, partnership or corporate body and there may be more than one Accountable Person for a building.
Where there is more than one Accountable Person, one of them is identified as the Principal Accountable Person. All Accountable and Responsible Persons in a building have a duty to co-operate with each other and with the Principal Accountable Person, and this is backed up by enforcement and sanctions.
The Principal Accountable Person must:
- Register the building with the BSR and obtain a Building Assurance Certificate. A building cannot be occupied until it is registered (and the Bill also requires existing occupied buildings to be registered).
- Appoint a Building Safety Manager and inform the BSR of that person’s identity.
- Assess building safety risks relating to their building, and take all reasonable steps to prevent the occurrence, and control the impact of, a major incident resulting from those building safety risks in or around the building. This is the Accountable Person’s key duty and it is ongoing. They demonstrate compliance with it by compiling and maintaining a Safety Case Report.
- The Safety Case Report is essentially a document demonstrating that the building is safe for occupation. The Accountable Person must review and maintain it, and submit it to the BSR when requested.
- Comply with various obligations covering engagement and participation, complaints handling, information provision and the role of residents in helping keep the building safe. The Accountable Person demonstrates compliance with these obligations by maintaining a Resident’s Engagement Strategy. This may include information about how a complaints process for residents operates or how residents access all relevant safety information.
The Accountable Person will be required to comply with all its statutory obligations on an ongoing basis. The Bill includes provisions allowing the BSR to take enforcement action for non-compliance. For example, the BSR can issue a compliance notice if the Safety Case Report is inadequate, and failure to comply with that notice is subject to criminal liability.
Building Safety Manager
The Building Safety Manager’s principal role is to support the Accountable Person in the day-to-day management of fire and structural safety in the building. The Building Safety Manager is appointed by the Principal Accountable Person.
The Building Safety Manager may be an individual or an organisation, provided they possess the requisite competence to carry out their role.
Unlike the explanatory notes that accompanied the draft Bill in July 2020, the explanatory notes accompanying the actual Bill provide no further information on the Building Safety Manager’s role.
A resident of a higher-risk building or an owner of a residential unit in such a building must:
- Not act in a way that creates a significant risk of a building safety risk materialising.
- Not interfere with safety equipment that is in the common parts of the building.
- Comply with an Accountable Person’s request in connection with their duty to assess safety risks in the building and take steps to prevent serious harm.
(Clause 95, Bill.)
Clause 96 of the Bill gives the Accountable Person considerable powers in relation to the residents’ duties, including the power to apply for a court order in certain situations.
Building safety charge
This has significantly changed since the first draft of the Bill (published in 2020).
In addition to the building safety duties, further covenants relating to the building safety charge regime are implied into “relevant leases”.
The Bill introduces the building safety charge, which is a charge payable by leaseholders in higher-risk buildings in respect of “building safety costs”. Building safety costs are costs (or estimated costs) incurred (or to be incurred) in connection with taking “building safety measures”. And building safety measures are the measures taken in relation to the building, but specifically exclude any measure that involves the carrying out of works.
These implied covenants will allow the relevant landlord to pass on the running and management costs of the building safety duties to the relevant tenant. Instead of being included in the service charge, these costs will be recovered through the mechanism of a separate building safety charge. The detailed provisions of the building safety charge are found in Schedule 7 to the Bill (which will become Schedule 2 of the LTA 1985).
It will not be possible to contract out of or restrict the building safety charge requirements.
Demands for building safety charge – statutory restrictions
Clause 121 of the Bill inserts a new section 47A into the Landlord and Tenant Act 1987 (LTA 1987). This requires a landlord to include certain information about the higher-risk status of the building in the written demand for sums due under the lease. If the information is not provided then any service charge, administration charge or building safety charge will not be due until the information is supplied.
In addition, under a new section 49A in the LTA 1987, it will be mandatory for the landlord of a higher-risk building to give the tenant a notice containing prescribed relevant information. This includes a statement that premises consist of or include a dwelling in a higher-risk building, the name and contact details of the Accountable Person, the Building Safety Manager, and the contact details of the BSR. Where a landlord fails to give this notice, any rent, service charge, administration charge or building safety charge will not be due until notice has been given.
Clause 124 of the Bill inserts a new section 20D into the LTA 1985 relating to the recovery of “remediation works” costs. The term “remediation works” is not defined in the Bill, but is to be defined by statutory instrument.
Depending on the terms of the lease, these costs are likely to be recoverable through the express service charge provisions in a lease.
- The proposed section 20D operates as a limitation on the recovery of service charges for remediation works and places a duty on a landlord to:
• Take reasonable steps to ascertain whether any grant is payable in respect of the remediation works and if so, to obtain the grant.
• Take reasonable steps to ascertain whether monies may be obtained from a third party in connection with the undertaking of the remediation works and, if so, to obtain monies from the third party.
• Take prescribed steps relating to any other prescribed kind of funding.
The other avenues of cost recovery could include buildings insurance, an indemnity policy or warranty, or making a claim against the developer or designer of the building. The Secretary of State may issue guidance on what reasonable steps would be.
Where there’s been a failure to discharge their duty to take reasonable steps in relation to funding, a leaseholder can make an application for a section 20D order which, if made, would limit or even extinguish the leaseholder’s liability to pay those costs via the service charge mechanism.
Amending the Fire Safety Order
Clause 134 of the Bill amends the Fire Safety Order (FSO) to require that:
- The Responsible Person (as defined in The Regulatory Reform (Fire Safety) Order 2005) must record their fire risk assessment.
- Any person appointed to assist a Responsible Person must be competent.
- The Responsible Person must record their fire safety arrangements.
- For buildings consisting of two or more sets of domestic premises, the Responsible Person(s) must provide specific fire safety information to residents about relevant fire safety matters, and must keep records of the relevant fire safety matters.
- The Responsible Person must take reasonable steps to identify themselves to all other Responsible Persons on the same premises.
- A departing Responsible Person must provide specific relevant fire safety information to their successor.
- For higher-risk buildings in England, the Responsible Person must identify and co-operate with Accountable Persons.
- A court must take into account a Responsible Party’s compliance or non-compliance with government guidance issued under article 50 of the FSO when considering offences of breach of the Order.
Remember: This is a draft bill. It’s working its way through Parliament, so it may change. Please keep up to date with it because it’s going to impact you!
What is happening about the divergence between Government statements on the need for an EWS1 and lending decisions?
This follows a speech from former Secretary of State for Housing, Communities and Local Government Robert Jenrick on 21st July.
In this speech, Jenrick said the Government had received expert advice on the risk to buildings in the UK. He concluded that low rates of dwelling fires, deaths and blazes spread beyond the room of origin meant “lenders should not be acting as if there was a widespread and systemic issue”.
He also said that EWS1 should no longer be requested by lenders when leaseholders are trying to sell in blocks below 18m.
What does the consultation on the role of the building safety manager cover and why should managing agents respond to it?
We’ve touched on the role of the Building Safety Manager under the Building Safety Bill and there has in fact been a consultation about this in September 2021.
This is regarding a draft PAS. A PAS (Publicly Available Specification) is a sponsored, fast-track, consensus-building informal standard that is produced by the UK national standards body, BSI Standards Limited. The development of PAS 8673 has been sponsored by the Department for Levelling Up, Housing and Communities.
BSI invited members to comment on this draft, which was titled ‘Built environment – Framework for competence of individual Building Safety Managers and nominated individual Building Safety Managers – Specification’. This relates to the competence and framework for BSMs.
This scope significantly exceeds the competencies required by a Building Safety Manager to discharge their duties under the published Building Safety Bill, which relate only to the risks of ‘spread of fire’ and ‘structural safety’.
There are concerns about the scope of the draft PAS because it’s seemingly wider than the role of the BSM set out in the Building Safety Bill.
All those involved in the management of higher-risk residential buildings were invited and encouraged to comment on the draft document.
The deadline for these comments was Wednesday 15 September 2021.
View the full Quarterly Legal and Compliance Updates for Block Managers Q3 webinar to see Cassandra talk more about these topics and others.