Service charge recovery and the Building Safety Act 2022

The Building Safety Act 2022 and associated regulations introduced a certification process to determine the liability of both landlords and leaseholders for the costs of remedying relevant defects, i.e. how much of these costs can potentially be charged to leaseholders via service charges. 

In this guide we explore the definition of a relevant building, qualifying lease, highlight which costs are not recoverable from leaseholders and whether there are any other limitations on recovery. We also consider what other options are available to local authorities facing significant remediation costs.

What is a relevant building?

A relevant building is a building which is at least 11 metres high or is a minimum of five storeys and in either case contains at least two residential units. The measurement must be taken from ground floor level (disregarding any basement/floors below this level) to the floor of the top storey (unless the top storey is exclusively used for housing plant and machinery, in which case this floor may also be disregarded).  

Please note, an additional regime also applies if the building is at least 18 metres high or is a minimum of seven storeys (i.e. it is a ‘higher-risk building’).

What is a qualifying lease? 

Most of the protections only apply to qualifying leases.

In summary, a lease is a qualifying lease if:

1. it was granted before 14 February 2022 (including some lease extensions completed after this date)
2. it was granted for a term of more than 21 years 
3. the leaseholder is liable to pay a service charge
4. on 14 February 2022 the dwelling was the leaseholder’s only or principal home, or the leaseholder owned no more than three dwellings in total at this date

Most residential flat leases will fulfil (1) – (3) above, but the information required in respect of point (4) is only likely to be available to the landlord once the leaseholder has produced a leaseholder deed of certificate. 

Which costs are not recoverable from leaseholders?

• Cladding remediation: the costs of cladding remediation are not recoverable from leaseholders with qualifying leases.
• The developer condition: where a landlord(s) or associated person as defined in the legislation is responsible for the defect, the costs are not recoverable from any leaseholders.   
• Net worth assessment / contribution condition: this requires a potentially detailed assessment of the landlord’s net worth as at 14 February 2022 and if the landlord meets the contribution condition (i.e. its net worth exceeds the relevant threshold), remediation costs are not recoverable from leaseholders with qualifying leases. However, local authorities and registered providers are exempt from the net worth assessment, which means that remediations costs will not be deemed unrecoverable by a local authority or registered provider on this basis.
• Low value leases: remediation costs are not recoverable from leaseholders with qualifying leases where the value of the lease, as determined under the legislation, is less than £325,000 in London or £175,000 elsewhere in England. 
• Legal/professional costs: professional costs relating to a leaseholder’s liability, or potential liability, for the cost of remedying a relevant defect are not recoverable from leaseholders with qualifying leases.  
• Shortfalls: it is not permissible to recover any shortfalls as a result of the above from other leaseholders of non-qualifying leases. 

Are there any other limitations on recovery?

Remediation costs incurred since 28 June 2017, that are recoverable from leaseholders with qualifying leases, are subject to a cap based on location and the value of the lease (calculated in accordance with the legislation) as at 14 February 2022:

Service charges which include remediation costs are also capped annually to an amount not exceeding one tenth of the above permitted maximums, which potentially spreads the cost for leaseholders with qualifying leases over a 10 year period. 

Are there any exceptions to the rules? 

Yes, where a landlord defaults in the certification process, (e.g. fails to provide a landlord certificate within the requisite timeframe), the above protections may apply to leases that would not otherwise qualify. 

Also, once the landlord has taken all required steps to obtain a leaseholder deed of certificate but where a leaseholder fails to provide one, the lease will lose protection and will be treated as a non-qualifying lease regardless of its actual status.   

Local authorities, registered providers of housing and some other public bodies are exempt from the net worth assessment, (i.e. the contribution condition). 

Service charge caps are modified in respect of shared ownership leases. 

Are there any other options for landlords facing significant remediation costs?

A landlord may potentially have a claim against any third party responsible for the defects, (e.g. the original developer).  

What else does a landlord need to consider?

The legislation modifies the service charge regime in respect of recovering remediation costs. However, the normal rules in relation to recoverability and consultation etc otherwise apply. 

The legislation imposes strict deadlines on landlords, including local authorities and registered providers, and it is therefore important that landlords understand their obligations.

This article has been produced as an overview only and does not fully reflect the detail and complexity of the Building Safety Act and associated regulations relating to the recovery of service charges.

For further information and advice, please contact Zoe McGovern, Sian Gibbon, or Caroline Frampton at Ashfords.