On 17 June 2017, fire broke out in Grenfell tower in North Kensington causing an unprecedented and tragic loss of life. The subsequent enquiry found that the fire (which was started by a faulty fridge) took hold of the building because of the flammable nature of the external cladding which had only been installed in the previous two years.
The cladding was constructed of aluminium composite material (ACM) and new building regulations came into force in late 2018 prohibiting the use of ACM in new buildings more than 18m tall.
However that did not deal with the main issue, which was the huge number of existing buildings which had potentially dangerous cladding on them. The Government was keen for these to be inspected and if appropriate, remediated. That naturally led into the question of who was going to pay for both the inspection and any required work, as the cost was clearly going to be enormous.
How is the government supporting?
The Government initially announced a fund of £600million for the removal of ACM cladding and then, because it was realised that most cladding is not ACM but could still be dangerous, a further £1billion for the removal of non ACM cladding. Neither sum was nearly enough, and that coupled with the less than user-friendly procedure and conditions for obtaining a grant, has led to considerable difficulties in getting the work paid-for and done.
This is in turn has an impact on the ability of a flat owner to sell their property. If remedial work is required and central funding is not available, how is it going to be paid for? If the building is relatively new (typically less than 10 years old) this may be a developer or contractor who specified or fitted the cladding, or it could be the warranty provider such as the National House Building Council (NHBC), who have accepted some claims. Alternatively a claim could be made on an insurance policy for latent defects, although many flat owners will not have such cover, and a normal building insurance policy won’t offer it because there is no actual damage.
Freeholder or leaseholder responsibility
If none of these is possible, then it comes down to the freeholder or the leaseholder or possibly a management company responsible for maintaining the building. Unless the freeholder has some inherent liability e.g. as a developer, it is not going to pay. In some cases the freeholder may be a company owned by the leaseholders. In other cases the management company may be responsible for the maintenance of the building whilst the freeholder is not. In both cases the flat leases are most likely to allow the freeholder or management company to recover the cost of the removal and replacement of the cladding through a service charge.
For most leaseholders this is likely to be prohibitively expensive, running into many thousands of pounds per flat. The vast majority of leaseholders will have to borrow to fund the service charge bill, which will put them in debt for years to come, or agree an instalment plan with the freeholder which will blight the service charge account for a similar period. When the flat owner wishes to sell the property any outstanding service charge will need to be disclosed to a potential buyer which will depress the value of the flat if it doesn’t put the buyer off altogether.
Potential issues with lenders
Unfortunately the problems don’t end just with the cost of putting right potentially dangerous cladding. Lenders have taken a very cautious view on buildings with cladding whether or not it is ACM or some other potentially dangerous material. Immediately after Grenfell there was concern that lenders wouldn’t lend at all on flats in tower blocks. That is not the case, but there are extra hoops for buyers and borrowers to jump through.
Lenders want to be sure that they are getting good security for the loan. In the normal course, the property will be checked for potential defects by a valuer and any urgent work identified is often required to be done as a condition of the loan. Potential issues with cladding have added an extra layer to this and in December 2019 lenders in conjunction with the
Royal Institution of Chartered Surveyors introduced the External Wall Fire Review Process or EWS1. Understanding the External Wall Fire Review Process (EWS1)
This is a survey which assesses whether the external walls of building contain materials which are potentially dangerous and whether the external wall system as a whole is safe. Originally designed only for buildings higher than 18m, it now covers blocks of any height. An EWS1 form is completed by a competent person following an inspection. However not all lenders require an EWS1 form, some require it only for blocks over 18m, and some always require one.
There is considerable inconsistency here which is perhaps not surprising considering the process was only introduced in December and we have been dealing with very unusual circumstances since March.
If an EWS1 form is required, obtaining one can also be a challenge, This is because the survey must be organised by the freeholder. An individual leaseholder cannot commission one and therefore is at the mercy of their landlord as to whether the inspection is made. A freeholder may reject a request simply because it isn’t mandatory to have one, or perhaps because there is no cladding or the building height is less than 18m. Even if the freeholder agrees, there may be a long delay before the survey is carried out and the form completed. There is also the issue of who pays for the survey. As it isn’t a legal requirement, the freeholder is not likely to do so, and the flat leases may not allow the recovery of the cost through the service charge. If an inspection is carried out and finds combustible material, we are back to the problem of who pays to put it right.
In the absence of an EWS1 form a flat owner may find that a buyer’s lender will refuse to lend or possibly give a valuation of £0, which sounds like nonsense except that it isn’t, as the flat might be unsaleable without a clear EWS1 form. The same problem also affects remortgages.
Without clear guidance or legislation on the use of the EWS1 process, together with a substantial increase in Government funding for remedial work, it is difficult to see a speedy or easy solution to the double whammy facing leaseholders.
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