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Who should pay for replacing flammable cladding?

First legal case raises more questions than answers

The first case on liability for the costs of replacing flammable cladding provides little comfort to lessees. The call by a first tier tribunal for the introduction of a warranty scheme to meet the repair costs was made after acknowledging that litigation on this issue is unlikely to be straightforward.

The dispute concerned works to a residential block in Croydon where lessees are facing a repair bill of up to £2.4m for replacing aluminium composite cladding panels. The property management company sought clarity from the first tier property tribunal as to who should pay for the repairs. The lessees of the 95 apartment block argued that the costs could not be passed to them through the service charge, as the cladding was not in disrepair because it remained as designed and constructed. They also argued that the costs were not periodical expenditure and so fell outside maintenance expenses.

In a decision on 13 March 2018, the first tier tribunal held that if a building manager is required to carry out cladding replacement works then lessees are obliged to contribute towards the repair costs, although it would be open to lessees to dispute their reasonableness. The leases on the Croydon block allowed not only repair costs to be recovered but also expenditure for “renewing or otherwise treating as necessary” the property in good and substantial repair. The building could not be said to be “in good and substantial repair order and condition” whilst the cladding remained a fire risk. In addition, the tribunal said that the recovery of costs relating to “rectifying or making good any inherent structural defects” would extend to the removal and replacement of defective cladding.

The tribunal observed that in granting 999 year leases the original freeholder was effectively relinquishing any capital interest in the flats and there was no prospect of the freeholder receiving other than nominal premiums. Accordingly, it would be reasonable to conclude that the parties would have intended that all future costs would be the responsibility of the lessees. That intention was confirmed by the use of identical words in the leases to define both the manager’s obligation to undertake the work and the tenant’s obligation to pay for it.

In order to recover the service charge repair costs, the tribunal acknowledged that lessees might have various legal claims open to them. Those claims could be against the manufacturer of the cladding, if warranties were given as to suitability; against the developer, if they were negligent as to the selection and installation of the cladding; against building control, if there were errors in the certification process; or against DCLG, if the building regulations were not fit for purpose. However, the tribunal acknowledged that the difficulty with all these claims is that they are speculative, with uncertain outcomes. No claims could reasonably commence until conclusion of the Grenfell inquiry and the cost of taking legal action could well be prohibitive. In the meantime, the lessees would find themselves mired in litigation during which their homes would be unsaleable, with the most vulnerable lessees being most at risk.

The tribunal acknowledged that such problems could be prevented if a warranty scheme was introduced for private tenants similar to that in the Housing Act 1985, which provided for 90% grants towards the cost of repairing designated defects in houses purchased from public authorities.

The tribunal’s decision provides clarity to landlords that costs related to replacing combustible cladding can be recovered from lessees subject to suitable drafting in the leases. However, the extent to which this decision applies to other blocks with flammable cladding will depend on the terms of those leases and the extent to which they follow or depart from the wording used in leases on the Croydon block.

Those now facing substantial repair costs will be considering how to recover any sums incurred, whether through insurance or litigation. The difficulty with some legal claims will be overcoming the principle that costs associated with physical damage to buildings can be too remote to be recoverable in the absence of a contractual link. Those without contracts with parties considered responsible or who do not benefit from collateral warranties may find it extremely difficult to successfully bring a claim, even where liability for the installation or design of defective cladding might appear clear. Only time will tell whether a scheme of the type referred to by the tribunal will be introduced. As the tribunal acknowledged, that is a political rather than a judicial decision.

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