Cladding, service charges and “relevant defects”: Court of Appeal to clarify BSA framework

Background

The dispute centred whether the landlord (Almacantar) could recoup the projected £7m cost of remediating defective cladding from the tenants of central London tower block, Centre Point House. Built in the 60s, the building's façade was inherently defective from the date it was completed, according to the First Tier Tribunal (FTT) judgment in the case, since gaps between the aluminium pressure plates made the timber frame prone to rotting.

The BSA provides that "no service charge is payable under a qualifying lease in respect of cladding remediation" (para 8, schedule 8). "Cladding remediation" is defined as the removal or replacement of any part of a cladding system that forms the outer wall of an external wall system and is unsafe. The key question was whether the building façade was a "cladding system" within the meaning of para 8, sch 8.

The remedial costs amounted to £240,000 per flat and the leaseholders disputed liability for the costs, including on the basis that the BSA prohibited the landlord from passing on the remedial costs via service charge. The FTT agreed and the landlord appealed.

The key issue

The appeal focussed on the interplay between the wording of the BSA itself and the wording of schedule 8:

• Section 122 of the BSA provides that schedule 8 "provides that certain service charge amounts relating to relevant defects in a relevant building are not payable…" (emphasis added)
• Relevant defects are defined in s120(2) as "a defect … that (a) arises as a result of anything done (or not done), or anything used (or not used), in connection with relevant works, and (b) causes a building safety risk".
• However, the wording "relevant defect" does not actually appear in para 8, sch 8, which instead refers to cladding which is unsafe.

Since the building's façade had been defective from the outset, it could not be a relevant defect because s120(3) requires works to have been carried out within 30 years of the BSA coming into force – but the construction had taken place more than 60 years ago.

As such, the tribunal was asked to decide whether s122 is a threshold test that must be met before para 8, sch 8 applies, or whether the only relevant test is that set out in para 8, sch 8. In other words, in order for the prohibition on passing on remedial costs to bite, does the remedial scheme need to be both in respect of a relevant defect and in respect of unsafe cladding? The FTT's answer was "no": "cladding remediation is to be treated as a distinct protection outside of the waterfall, not contingent on there being a 'relevant defect'…  No qualifying leaseholder will ever have to pay for unsafe cladding remediation. That is neither unclear or ambiguous and does not lead to absurdity. It accords with the schema of the 2022 Act."

The Upper Tribunal's findings

The UT agreed, finding that the wording of para 8 is clear and unambiguous and reflect the government's statement that "no leaseholder living in their own flat 'would pay a penny to fix dangerous cladding.'" In the UT's view, the para 8 provisions are not part of the remediation package set out in ss116-124 and the rest of schedule 8. Para 8 is a separate provision which "has its own integrity" and is concerned solely with service charges. This explains why it is not subject to the 30-year time limit imposed by s120(3). Section 120 is descriptive and general and is not intended to affect the wording of para 8.

The UT went on to uphold the FTT's finding of fact that the façade of Central Point House was the outer wall of an external wall system and was therefore cladding for the purpose of para 8.  Similarly, the façade was "unsafe", which meant "something more than simply out of repair" and is a wide term intended to "encompass a range of threats to the safety of the building or to its residents or nearby members of the public". The UT rejected the landlord's argument that construction of the word "unsafe" should be limited to fire safety issues.

Overall, the landlord was therefore prohibited by para 8 from passing on the costs of remediating the building's façade to the leaseholders.

Conclusion

Aside from restricting recovery via service charge of remediation works to defects present prior to 28 June 1992, the decision also has a key impact on Remediation Contribution Orders. If the UT decision stands, these will not be available to leaseholders or landlords in respect of para 8 costs that are not relevant defects. This is a consequence of the UT's finding that this is simply outside the main leaseholder protection scheme – but while the UT found that it was "explicable", presumably it is an unintended consequence as it undermines the BSA's aim of enabling recovery of remedial costs from those responsible for construction or installation of defective works.

While an unwelcome decision for landlords, it follows the trends of the courts seeking to enforce the stated aims of the BSA by taking a pro-leaseholder approach. Property managers should now review their portfolio with a view to identifying any buildings requiring remedial works to defects present for more than 30 years so that they can be prepared for the outcome of the appeal.