The Continuing Cladding Conundrum

In our earlier update, we brought readers news that Gove had warned developers that they must pay to fix unsafe cladding in an open letter to the industry.  More recently we explained that the Government has written a further open letter to residential property developers setting out “commitments expected from developers”.

We are now pleased to be able to re-publish the full text of an article written last month and which was first published in Property Law Journal 394 (February 2022) and is also available on lawjournals.co.uk.

Alexandra Adams and Dean Cooper look at the most recent Government announcement in response to unsafe cladding.

Another plan to fix unsafe cladding – what has changed?

Back in June 2018, in an answer to a PMQ about the costs faced by tenants of removing and remediating unsafe cladding, then Prime Minister, Theresa May, said, “building owners in the private sector … must do the right thing, and if they do not, we are not ruling anything out…[1]” And yet, some four and a half years after the Grenfell Tower disaster, an announcement by the Secretary of State for Levelling Up, Housing and Communities, Michael Gove on Monday 10 January 2022 that ‘no leaseholder living in a building above 11 metres will ever face any costs for fixing dangerous cladding' [2], is making headlines.  In an open letter to residential developers published in tandem with the announcement, Gove warned developers that they have until the end of March 2022 to work with Gove’s department to agree a fully funded plan of action to fix the cladding crisis [3].  So, what has really changed in this time? And, how can we expect this new policy to play out? 

The funding status quo

The full cost of the fire safety remediation work that is required on every high-rise or high-risk residential building has been estimated at around £15 billion [4]. Government funding announced to date amounts to £5.1 billion.

Until this latest announcement, the focus of Government funding – in the form of  its aluminium cladding system (ACM) remediation programme and the Building Safety Fund (for the capital costs of replacing and removing unsafe non-ACM cladding)  - was on buildings of 18 metres or more. For cladding removal on buildings of between 11 and 18 metres, the Government proposed a long term, low interest loan scheme under which, it promised, no tenant would ever pay more than £50 a month towards the removal of unsafe cladding. To date, no Government funding has been available for the remediation of unsafe cladding on buildings below 11m. 

The Government’s Building Safety Bill (which is progressing through Parliament) does not address this funding gap. The Bill sets out a new regime for the management of building safety risks in high-rise buildings and includes provision for a ‘building safety charge’ (to be paid by tenants), but the latter only covers the cost of the new building safety regime, and not the cost of remedial work to fix unsafe cladding.

In other words, until the Government’s latest announcement there was a funding gap for buildings below 18 metres.

Gove’s demand to the residential property developer industry

The Department of Levelling Up, Housing and Communities’ (“DLUHC”) letter of 10 January 2022 focuses on buildings between 11 and 18 metres, but also relates to buildings of 18 metres or higher. The letter warns residential developers that they have until the end of March 2022 to work with the DLUHC to agree a fully funded plan of action to fix the cladding crisis.  This plan of action must, the Government says, be built around clear commitments on the industry’s part to:

1. make financial contributions this year and in subsequent years to a dedicated fund to cover the full outstanding cost to remediate unsafe cladding on residential buildings between 11 and 18 metres (currently estimated at £4bn);
2. fund and undertake all necessary remediation of residential buildings over 11 metres that developers have played a role in developing; and
3. provide comprehensive information on all residential buildings over 11 metres which have historic fire safety that developers have played a part in constructing in the last 30 years.

The Government says that it does not intend to hold these discussions behind closed doors: it will host a roundtable that brings together 20 of the largest housebuilders and developer trade bodies, followed by ongoing negotiations with all those in scope, including tenants.

Critically, the Government has said that it will take all necessary steps to make this new plan happen, including restricting developer’s access to government funding and future procurements, using planning powers, pursuing companies through the courts or, if necessary, imposing a solution in law.

The Government will announce a decision on which developers will be in scope to make funding contributions to the new plan, but it is expected to cover all companies with annual profits from housebuilding of £10 million or more.

Other DLUHC announcements

In tandem with the letter to the residential property developer industry, Michael Gove made a series of important announcements in Parliament on 10 January 2022 [5].  The Government, he said, intends to:

• “open up the next phase of the building safety fund early this year and focus relentlessly on making sure it is risk driven and delivered more quickly….”;
• “ensure that those at fault, …. pay to put things right”: a new dedicated team will be established in the DLUHC to expose and pursue those responsible; and Government schemes and programmes will be reviewed to ensure that there are commercial consequences for any company that is responsible for the crisis;
• restore “common sense” to building assessments: this includes:
  • an assumption that, unless there is clear evidence to the contrary, there is no risk to life in medium-rise buildings (and by implication, low rise buildings);
  • withdrawal of the Government’s Consolidated Advice Note (CAN), which, the Government says, was “wrongly interpreted” (prompting lenders to demand EWS1 forms for low and medium rise buildings);
  • where a detailed assessment of the fire risk of external walls is deemed necessary, use of the British Standards Institution’s Publicly Available Specification (PAS) 9980; and
  • a scheme to indemnify building assessors conducting external wall assessments (because the insurance industry has been reluctant to offer professional indemnity insurance to assessors); and
• introduce new protections for tenants: these include:
  • scrapping the proposed loan scheme for tenants of buildings between 11 and 18 metres;
  • a promise that no tenant living in a building above 11 metres will ever face any costs for fixing dangerous cladding; and
  • new statutory protections for tenants built into the Building Safety Bill.

In addition, the Government will:

• introduce amendments to the Building Safety Bill to retrospectively extend the legal right of building owners and leaseholders to demand compensation from developers for safety defects up to 30 years old (to date, the Bill only covers defects up to 15 years old);
• make available an additional £27million to fund more fire alarms (to end the use of waking watches – a fire safety system whereby suitably trained staff continually patrol the floors and exterior perimeter of a building to maintain the safety of its occupants from fire - which are costly and often paid for by tenants); and
• ensure tenants are protected from forfeiture and eviction because of historic fire safety costs.

So, what has changed?

The funds that Michael Gove refers to in his letter to the residential developer property industry – the £4 billion that he expects developers to fund – are in addition to the existing Government funds, totalling £5.1 billion. This announcement, then, potentially means a lot more money to fix the cladding crisis and to make our residential buildings safer.  

Moreover, the message to developers is clear: in a complete volte-face, the Government has decided that tenants – at least of buildings over 11 metres - shouldn’t have to pay to fix cladding; and developers should.  The money that bigger developers must put up to finance this new fund is in addition to the money that they must find to pay the building safety levy (a new levy on developers who seek regulatory permission to build certain high rise residential buildings, proposed by the Building Safety Bill) and to meet the demands of the new residential property developer tax (a new tax of four per cent on developers in the residential property market making in excess of £25 million profit). This announcement, then, means developers face a hefty bill.

In addition, in withdrawing the CAN, the Government has opened the door for lenders and the Royal Institute of Chartered Surveyors (RICS) to change their policies on the use of EWS1 forms for low and medium-rise buildings. Lenders have routinely made EWS1 forms a condition of approving mortgage applications and, as a result, thousands of low and medium-rise buildings have been dragged into the cladding crisis (when arguably the presence of combustible materials in cladding on these buildings does not present a fire safety risk because of the height of the building). The result has been that tenants of these buildings have been unable to sell their flats.  If the RICS and lenders’ policies towards the use of EWS1 forms change (as they promised it would if the CAN were withdrawn), then tenants of low and medium rise buildings where there is no real fire safety risk should find that they are able to sell their flats again.

How can we expect this new policy to play out?

Arguably, the prospects for unclogging the market for leasehold flats in low to medium rise buildings where there is no real fire safety risk, look brightest: the RICS has already announced that it welcomes Michael Gove’s announcement and that it “will consider its impact on valuation practice carefully with stakeholders” [6]. However, the prospects for the remediation of historic fire safety defects, whilst improved, do not look as bright.

Even if this new plan to fix cladding on buildings between 11 and 18 metres is fully funded, the money generated by this plan, the building safety levy and the new residential property developer tax, together with the existing Government funds for remediating ACM and non-ACM cladding, will not be sufficient to meet the estimated £15 billion cost of remediating high-rise buildings, let alone the as yet unquantified bills for medium and low-rise buildings.

Moreover, whilst the announcement in Parliament does address some of the costs of remediating wider fire safety failures (for example, in the making of provision for new fire alarm systems rather than the use of waking watches and in ensuring that leaseholders are protected from forfeiture and eviction because of historic costs), the central tenet of the new plan remains to fix unsafe cladding. As with previous plans, this plan fails to address how the costs of wider fire safety (such as inadequate internal compartmentation or missing cavity barriers and fire breaks) will be paid for.

Equally, it is not clear how the Government will make sure that the new plan is fully funded.  The announcements talk about a new dedicated unit within the DLUHC which will investigate the companies that are responsible for the cladding crisis and a variety of measures that the DLUHC will be prepared to use if developers do not fund the plan sufficiently.  Already, we have an example of what this may mean in practice: just before Christmas 2021, Michael Gove instructed Homes England to suspend Rydon Homes, which is closely connected to the company that refurbished the Grenfell Tower, from its participation in the Help to Buy scheme, with immediate effect.  However, in many cases, developers who developed the buildings caught up in this crisis will no longer exist - developments are often carried out by SPVs, especially incorporated for that very purpose; and these SPVs are often wound up when the development is completed. Who then will the Government pursue for funds?  And where developers do still exist, can they be liable where they complied fully with the buildings regulations that were current at the time (even though these may since have been shown to be insufficient) or where they passed on their legal responsibility to contractors or other parties? 

If the Government and developers cannot reach a voluntary agreement to fund this new plan, the Government threatens that it will impose ‘a solution in law’ on developers.  There are some indications about what this new solution might be.  It may be another new tax on developers or the wider construction industry, but apparently the Treasury are not happy with this idea; or it may mean enshrining the ‘Polluter pays’ principle into the Building Safety Bill, apparently an option that is more popular with the Government. If the ‘Polluter pays’ principle were adopted, any new scheme might be similar in form to that proposed by the Dangerous Buildings Remediation Scheme, itself a proposed amendment to the Building Safety Bill (which has so far been rejected). This scheme provides for a statutory determination process to come to decisions about whether a building was compliant with building regulations in force at the time of construction. If a building is non-compliant, in the first instance the developer would be required to pay the remediation and interim safety costs (liability would extend to parent companies where subsidiary SPVs have been wound up on completion of the development or sold to ground rent funds); and, in the second instance, where it is not possible to obtain recompense from the responsible developer, funding would come from levies on the construction industry and ancillary businesses.

Conclusion

The issues surrounding the cladding crisis (and building safety more generally) are complex and the funds that are available to remedy the crisis, including those that will be generated by this new plan, are not sufficient.  Indeed, both the building safety fund and the waking watch fund are now closed to applications.  All this means that there remains lots of uncertainty: for leaseholders living in flats with unsafe cladding; for developers, who must plan for new financial contingencies; and for the wider construction sector who face the prospect of legal claims by developers for compensation (where developers incur the costs of remediating fire safety defects) and, if the ‘Polluter pays’ principle is enshrined in law, the prospect of a sector wide levy.

20 January 2022

Alexandra Adams is a Professional Support Lawyer and Dean Cooper is a Legal Director in Clyde & Co LLP’s UK real estate team.