Article contributed by Sara Jabbari, Tanfield Chambers
It is fast approaching the first anniversary of Part 5 and Schedule 8 to the Building Safety Act 2022 (referred to throughout this article as the “BSA” or simply as the “Act”) coming into force. Part 5 extends liability for historic building defects through significant reforms to existing legislation. Schedule 8, together with regulations enacted thereunder, imposes substantial restrictions upon the ability of landlords to pass on the costs of remedying historic defects to tenants via the service charge provisions in their leases and confers new powers upon the First Tier Tribunal to make remediation orders and remediation contribution orders. Unsurprisingly, the past 10 months have witnessed a flurry of activity behind the scenes, as landlords and tenants of affected buildings, and their professional advisors alike, have grappled with the practical and legal implications of the Act.
It is fair to say that it has not been entirely plain sailing. Under significant pressure to implement the recommendations of the Hackett Report, the Government’s drafters produced the BSA (Building Safety Act) in haste over Easter 2022. In turn, the BSA made it into the Queen’s speech and onto the statute books by July 2022; however, this required significant provisions to be implemented by statutory instrument at the cost of proper time for parliamentary scrutiny. Frankly, it shows, as the old idiom goes, ‘the devil is in the detail’ and this is particularly true of the provisions relating to recovery of remediation costs through service charges. In particular, the prescribed requirements relating to the provision and content of landlord certificates and leaseholder deeds of certificate are now notorious for the burden they place on landlords and the complexity they add to the operation of Schedule 8, rather unhelpfully implemented by two separate regulations – the Building Safety (Leaseholder Protections) (England) Regulations 2022 SI 2022/711 (the “711 Regulations”) and The Building Safety (Leaseholder Protections) (Information etc) (England) Regulations 2022 SI 2022/859 (the “859 Regulations”).
One key group amongst whom the BSA has caused particular consternation is residential conveyancers. Indeed, such was the level of concern, that there have been reports of increasing numbers of conveyancers declining to act in relation to sales of flats in flats situated in relevant buildings. This article considers a key issue at the heart of the furore; namely, the inherent in navigating certification requirements and the consequences that flow from non-compliance in the context of Schedule 8.
Putting Certification into Context: the basic scheme in Schedule 8
As explained by s.122 BSA, “Schedule 8 … provides that certain service charge amounts relating to relevant defects in a relevant building are not payable” (i.e., regardless as to what would otherwise be the contractual position between the parties to the lease). It is important always to keep in mind that Schedule 8 is only relevant at all where a premises is situated within a “relevant building” (defined in s.117) and is concerned only with “relevant defects” (defined in s.120), in particular, the costs of “relevant measures” (i.e. a measure taken to remedy the relevant defect or to prevent/reduce or ameliorate the risk of one arising – as defined in para 1(1) of Sch. 8).
The basic scheme as expressed by Schedule 8 is that where the “relevant landlord” (in this context meaning the landlord or any superior landlord at the qualifying time i.e. 14 February 2022) was either “responsible” for the relevant defect (i.e. because they were the developer or in a joint venture with the developer or otherwise, undertook or commissioned works relating to the defect) or was “associated with a person responsible” for it, no service charge is payable under the lease of any premises in a building in respect of a relevant measure (para 2(1), Sch. 8). But (subject to regulation 6(7) of the 711 Regulations) in any other case, landlords are prevented from recovering the costs of relevant measures through service charge provisions only if the lease meets the definition of a qualifying lease in s.119(2) of the Act and certain specific conditions are met.
To fall within the definition of a “qualifying lease” under s.119(2) BSA, the lease must have been granted before 14 February 20221, be more than 21 years in duration, contain an obligation to pay a service charge (“Conditions (a)-(c)”) and, as at 14 February 2022, it must have been the only or principal home of a leaseholder, not owning more than two other dwellings in the UK (whether freehold or long lease) apart from their interest under the lease (“Condition (d)”). Pursuant to paragraphs 3 to 7 of Schedule 8, no service charge is payable under a qualifying lease in respect of relevant measures relating to a relevant defect where:
- The relevant landlord (here meaning the landlord under the lease at the qualifying time) met the “contribution condition” (para 3(1), Sch. 8). This means that the landlord group (defined at para 3(4), Sch.8) had a net worth at the qualifying time of more than N (being the number of relevant buildings in respect of which (or any part of which) a member of the landlord group was a landlord under a lease) x £2m.
- The qualifying lease had a value of less than £325,000 (if in Greater London) or £175,000 in any other case (para 4, Sch. 8) at the qualifying time.
- The charges are in respect of either cladding remediation (para 8, Sch.8); and/or legal or other professional services relating to the liability (or potential liability) of any person incurred as a result of a relevant defect (including obtaining legal advice, any proceedings before a court or tribunal, arbitration, or mediation) (para 9, Sch. 8).
In all other cases, the costs of relevant measures may be passed on but subject to a statutory cap – the “permitted maximum” (paras 5 and 6, Sch. 8) as well as annual cap (para 7, Sch. 8).
The advantage of the provisions which apply only to qualifying leases (i.e., those in paras 3 to 9, Sch.8) is that they do not require the leaseholder to establish who was responsible for the particular defect or their relationship with the relevant landlord. If met, the contribution condition also creates certainty for leaseholders (as well as anyone purchasing the lease under them) by removing the need for a case-by-case assessment of the defect in question. It, therefore, makes sense that Schedule 8 and the regulations enacted thereunder ought to create a straightforward mechanism for determining the qualifying status of a lease as well as whether the contribution condition is met. However, the prescribed certification and information requirements (and the consequences that flow from non-compliance) go much further.
The Certification Requirements and Consequences in Default
The certification requirements (i.e. the requirement upon the tenant to provide a leaseholder deed of certificate and upon the landlord to provide a landlord’s certificate) were borne out of the obligation in paragraph 13 of Schedule 8 for the leaseholder to provide proof of their qualifying status and in paragraph 14(1), to provide a means for the landlord to establish that the relevant landlord did not meet the contribution condition. However, owing to the broad powers given to the Secretary of State in Schedule 8 to create regulations for the provision of certification and information (and absent the parliamentary scrutiny as the Act), the landlord certificate in particular, has been enlarged to include information and evidence going far beyond the purpose for which the certificate was ostensibly introduced.
The Government has been extensively criticised for prescribing information that is difficult to obtain, incapable of independent verification and is unnecessary in any case in which the contribution condition is admitted as being met. For example, where the relevant landlord is part of a group, regulation 6(3) of the 711 Regulations requires the landlord to provide extensive structural and financial information, much of which may be sensitive and not be available publicly. This includes extensive details of the group structure, the beneficial ownership of each company in the group, trust and tax arrangements, the names of every director of each company in the group (including shadow, nominee and person fulfilling the role of director by whatever name they are called) as well as the names of persons exercising significant control or influence over the group, whether directly or indirectly. Regulation 6(4) of the 711 Regulations, then goes on to require the provision of audited accounts confirming the net worth (according to the definition in regulation 5 of the 711 Regulations and paragraph 3 of Schedule 8 to the Act) of each company in the group.
One might be forgiven for concluding that the requirements were intended to be unnecessarily onerous, to disincentivise landlords from complying with the certification and evidence requirements, particularly in circumstances where the relevant landlord is part of a large group structure (where the disclosure requirements provide a greater burden). In consequence, the prohibitions on recovery of the cost of relevant measures through the service charges is extended from the basic position under Schedule 8, because where the landlord under the lease is also the relevant landlord (within the meaning of paragraph 2 of Schedule 8), in consequence of default, it is not only presumed that the relevant landlord under paragraph 3(1) of Schedule 8 to the Act met the contribution condition (as per para 14, Sch. 8) but the relevant landlord is treated as being responsible for the relevant defect under paragraph 2(2) of Schedule 8. As a consequence, no service charge is payable under any lease of a premises in a relevant building (regulation 6(7) of the 711 Regulations).
This appears to be an unforeseen consequence of paragraph 14(2) of Schedule 8; according to The Explanatory Note to the Act, paragraph 14(2) was intended to, “allow regulations to be made setting out that the landlord is treated as being responsible for identified relevant defects according to paragraph 2 unless they have provided a certificate demonstrating that they were not responsible for the defects”. Regulation 6(7) of the 711 Regulations appears to be much broader than this in its application.
Other features of the overall scheme of the Schedule/711 Regulations which appear to favour default over and above compliance are the limited powers conferred upon the Tribunal to order compliance and/or to extend the tight deadlines applying to the landlord so as to avoid the consequences of non-compliance. The landlord’s short and strict deadlines under the Regulations stands in stark contrast to the position vis a vis leaseholders un the 859 Regulations. Further, where the landlord is not the relevant landlord and lacks the relevant information to complete the landlord certificate, the 711 Regulations creates a very half-hearted mechanism to enable it to obtain this information from the relevant landlord; notably, it confers no power upon the Tribunal to order the relevant landlord to comply with a request under Regulation 6(6) or to extend the current landlord’s 4-week deadline in regulation 6(1) to enable it to obtain the missing information and complete the landlord certificate within time. Finally, the tribunal has no power (under Sch.8, para.16(5) and 711 Reg, reg.11) to order the production of a certificate where one is not given, in contrast to the position where it is shown that the landlord has made a false claim in the certificate (specifically including a false claim not to be the developer or that the contribution condition is not met); this was confirmed by the decision of the FTT in Flat 16 Grove House, 76 Sidmouth Avenue, Isleworth, Middlesex, TW7 4FQ (LON/00AT/HYI/2022/0003).
Overall, the prescribed requirements in relation to the landlord certificate create a rather blunt tool, and whether aimed towards capturing as much information as possible or more cynically, disincentivising as many landlords as possible from providing a certificate at all (so as to engage the presumptions in paragraphs 14(2) of Schedule 8 and regulation 6(7) of the 711 regulations), the Government appears to have given little thought as to how the information can be verified where the landlord does attempt to comply. This in turn creates difficulty for anyone seeking to provide advice in relation to the applicable rules in circumstances where it is either suggested that the contribution condition is not met – or perhaps more likely, where a lease is not a qualifying lease.
The leaseholder deed of certificate improves this position somewhat. Its’ function is to demonstrate that a lease which satisfies the conditions (a)-(c) of s.119(2) of the BSA 2022 also satisfies condition (d) as at 14 February 2022 and to improve the position of leaseholders, creates a raft of requirements that the landlord has to satisfy in order to avoid a presumption that condition d is presumed met (as per paragraph 13(2) of Schedule 8). The obligation upon the leaseholder to provide a deed of certificate is required only upon receipt of a notice by the landlord (also in a prescribed form), within a generous 8-week timeframe and with provisions for follow-up notices and extensions on demand given by the landlord and no comparable presumption in the event of late compliance complying.
The requirement for landlord to send the initial notice to the leaseholder and start the cascade of reminders, is triggered by the landlord either becoming aware that the lease is “to be sold” or that there is a relevant defect in the building in question (Reg 6(11). There is no guidance as to what ‘to be sold” means – and what stage this requirement will bite (for example, when it is sufficient for an offer have been accepted or necessary for contracts to have been exchanged) or what is required in order for the landlord to become aware (for example, whether actual or constructive knowledge will suffice). Here too, the Regulations suffer from imprecise drafting, creating uncertainty. Further uncertainty is introduced into the effect of paragraph 13(2) of Schedule 8, by the inclusion of the requirement for the landlord to take “all reasonable steps” in addition to any prescribed steps. For a full breakdown of the extensive requirements imposed on the landlord to avoid the presumption in paragraph 13(1) of Schedule 8 to the Act, reference ought to be made to Regulations 6 and 7 of the 859 Regulations themselves. These provisions stand in stark contrast to the strict deadlines applying to a landlord in respect of their provision of a landlord’s certificate, the requirements include the provision of further reminder notices by the landlord, as well as telephone calls, and the grant of mandatory extensions upon request).
Conclusions and practical suggestions for conveyancers
The Government does not appear to have anticipated the pressure that would be applied to conveyancers to validate the information contained within and/or provided with the certificates by cautious mortgage lenders, or the practical difficulty of assessing whether the presumptions under Schedule 8 are engaged in these circumstances. Indeed, the way in which the requirements would impact upon the conveyancing process does not appear to have been given thought at all, notwithstanding the landlord’s knowledge of the sale of a lease triggering landlord’s obligations to give a landlord certificate under the 711 Regulations as well as a notice in relation to the leaseholder deed of certificate under the 859 Regulations.
So where does this all leave conveyancers? In a recent update to the Mortgage Lenders’ Handbook many of the initial requirements to verify information in the leaseholders’ deed of certificate and landlords’ certificates appear to have been watered down. This may in turn, relieve the pressure on conveyancers (both from leaseholders and lenders alike) so that they are encouraged to resume dealings with sales of premises in relevant buildings under the Act. However, conveyancers acting for leaseholders and buyers remain well advised to make it clear to clients and their lenders, that investigations as to the accuracy of factual information contained in the certificates (outside of what is confirmed by publicly available documents) will not be undertaken as part of the usual conveyancing process and to be wary of giving advice as to the accuracy of information provided in the certificates or advice which assumes the information therein to be accurate.
Where conveyancers can however add value, without increasing costs out of all proportion, is by focusing on the prescribed procedural requirements under regulation 6 of the 711 Regulations and regulations 6 and 7 of the 859 Regulations, the identification of any obvious omissions and/or instances of non-compliance in respect of each. This will enable conveyancers to spot if any presumptions apply on account of a party’s default and narrow the scope of uncertainty.
Landlord Certificate: It will be helpful to diarise the key deadlines applying to the landlord (both under the 711 Regulation and the 859 Regulation) and retain (or advise the leaseholder to retain) proof of delivery of any notification of sale triggering the running of time thereunder. If 4 weeks passes and no landlord certificate has been provided to the leaseholder, or a certificate has been complied which does not comply with the prescribed requirements in Schedule 6 of the 711 Regulations, where the current landlord is the same as the relevant landlord, regulation 6(7) of the 711 regulations will apply and no service charges will be payable under a lease of premises in a relevant building, regardless of the qualifying status of the leaseholder. Alternatively, if the current landlord is not the relevant landlord, then where the tenant has a qualifying lease (or has been deemed to by qualifying by virtue of Reg 6 of the 859 Regulations) then the contribution condition will be deemed met and no service charges will be payable in relation to a relevant defect/relevant measures.
Leaseholder Deed of Certificate: Whether acting for a buyer or a seller, it is useful to keep in mind that where the lease does not meet the qualifying condition d, there is a benefit in not providing a leaseholder deed of certificate and where applicable, requesting extensions so as to benefit from the presumptions in paragraph 13(1) of Schedule 8 in the event that the landlord fails to comply with any of the strict requirements under regulations 6 and 7 of the 859 Regulations. This stands in contrast to the position where the lease is a qualifying lease, in which case it is in the interest of the leaseholder to establish their qualifying status without delay. Where the landlord complies with the prescribed steps, and condition (d) is not met, it is useful to consider whether there are any other reasonable steps that could practically have been taken to have obtained the leaseholder deed of certificate. If not, the prospects of benefiting from the restrictions in Schedule 8 look likely to be limited to cases when the relevant defect was the responsibility of the relevant landlord (under paragraph 2(2) of Schedule 8), which must be assessed on a case-by-case basis.