Building Safety Act 2022 - Residential Leaseholder Protections - Boodle Hatfield

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Building Safety Act 2022 - Residential Leaseholder Protections

The Building Safety Act 2022 (the Act) includes significant measures to ensure the safety of leaseholders occupying higher rise buildings and to protect leaseholders from liability to pay for works to remedy building safety defects that would otherwise be recoverable via the lease service charge (leaseholder protections).

Leaseholder protections may be relevant to both existing leaseholders and those looking to purchase a new or existing leasehold interest in a higher rise building. This briefing gives an overview of the application and availability of leaseholder protections.  Further transaction specific advice should be obtained where appropriate.

Glossary

The leaseholder protections detailed in this briefing apply only to relevant buildings where there is a relevant defect relating to relevant works and (save where the developer test is satisfied) where the lease is a qualifying lease.  These terms are key:

  • Relevant building: A self-contained building that contains at least two dwellings and is at least 11 metres high or has at least 5 storeys (subject to certain exceptions including where the building is leaseholder owned).
  • Relevant defect: A defect that arises because of anything done (or not done) or used (or not used) in connection with relevant works that causes a safety risk (being a risk to the safety of people in or about the building arising from the spread of fire or the collapse of the building) including, but not limited to, defective cladding.
  • Relevant works: Works relating to the construction or conversion for residential use of a building or to remedy a relevant defect (in each case where completed between June 1992 and June 2022).
  • Qualifying lease: A lease that meets all the following criteria:
    – The lease is a long lease (more than 21 years) of a single dwelling in a relevant building where the leaseholder is responsible for the payment of a service charge.
    – The lease was granted before 14 February 2022 (or was granted before this date and subsequently extended after this date).
    – The dwelling was the leaseholder’s only or main home on 14 February 2022 OR the leaseholder did not own more than 3 dwellings in the UK on 14 February 2022.
  • Qualifying leaseholder: The current owner of a qualifying lease.

Leaseholder protections

The nature and availability of leaseholder protections will depend on whether the building owner was the developer of the building (or deemed to be so – see below) the nature of the defect, the status of the building owner and leaseholder and the value of the lease.

Developer test

Leaseholder protections may apply where the building owner (on 14 February 2022) was (or was associated with) the developer responsible for a relevant defect in a relevant building.  Where leasehold protections apply, the building owner will not be able to pass the cost of remediating the relevant defects to the current leaseholders via the lease service charge.

The leaseholder does not have to be a qualifying leaseholder to benefit from this leaseholder protection.  This is known as the developer test.

Cladding defects

Leaseholder protections may apply where the relevant defect in a relevant building relates to the remediation or removal of unsafe cladding.  Where leasehold protections apply, the building owner will not be able to pass any of the remediation costs relating to cladding defects to the current leaseholders via the lease service charge.

The leaseholder must be a qualifying leaseholder to benefit from this leaseholder protection.

Non-cladding defects

Leaseholder protections may also apply where the relevant defect in a relevant building relates to the remediation of non-cladding defects. Where leasehold protections apply the remediation costs that the building owner may pass on to the current leaseholders via the lease service charge in respect of non-cladding defects may be capped or reduced (see further below).

The leaseholder must be a qualifying leaseholder to qualify for leaseholder protection in each of the following scenarios.

  • Low value test: The building owner cannot pass any of the costs of remediating non-cladding relevant defects to a qualifying leaseholder if the value of the dwelling (on 14 February 2022) was less than £325,000 (London) or £175,000 (elsewhere). The value of the lease is assessed using the last purchase price and applying a multiplier. This is known as the low value test.
  • Contribution condition: The building owner cannot pass any of the costs of remediating non-cladding relevant defects to the holder of a qualifying lease if the building owner (on 14 February 2022) had a net worth of more than £2M per relevant building. This is known as the contribution condition.
  • Qualifying leaseholder caps: Where the low value test and the contribution test (above) are not satisfied, the building owner may pass the remediation costs for non-cladding defects to the current leaseholders via the lease service charge. However, statutory caps are in place to limit the sums that qualifying leaseholders can be charged over a 10-year period.  The caps are determined by the value of the dwelling as at 14 February 2022 (assessed using the last purchase price and applying a multiplier). The maximum sum payable (in respect of a property value in London of £2M+) is currently £100,000 IE £10,000 per year over a 10 year period.  Any shortfall in payment as a result of the cap will fall to the building owner to pay.

Where leaseholder protections apply

When buying a lease in a relevant building the buyer should ensure that its survey includes investigations to ascertain the existence of any relevant defects that may require remediation and, where applicable, the building owner should be asked to provide details of any planned works to remedy any such defects.

Notwithstanding that leaseholder protections may operate to limit or cap service charge contributions, works required to remedy relevant defects may cause considerable disruption and disturbance to the occupation of the property.

The exercise to ascertain whether and to what extent leaseholder protections apply can be quite complex.  Care should be taken to ensure that all appropriate documentation is in place to benefit from any applicable leaseholder protections.  Details of the two key documents required to ascertain the existence of and claim leaseholder protections are detailed below:

Claiming leaseholder protections

The Leaseholder Deed of Certificate (LDOC) is the document setting out the information that a landlord will need to identify the extent to which a lease is a qualifying lease.  This will vary from case to case but should include a copy of the Land Registry title to the property and evidence confirming whether or not the property was the only or main home of the person that was the tenant in occupation on 14 February 2022.

It may be worthwhile preparing an LDOC even if you do not intend to sell your property in the short term (and even if you know that the lease will not be a qualifying lease) as the information required to complete the LDOC is set at 14 February 2022 and will not change.

The Landlords Certificate (LC) is the document used to demonstrate whether the building owner (on 14 February 2022) satisfies the developer test or the contribution condition and is prepared in respect of a LDOC to confirm if the lease is a qualifying lease.

Transfer of benefit

Where leaseholder protections are available and have been documented as detailed above, the benefit of the protections stays with the qualifying lease and will therefore transfer automatically to a purchaser on the sale of the qualifying lease who will become the qualifying leaseholder.

Where leaseholder protections do not apply

A lease that does not benefit from leaseholder protections is not defective.  However, the leaseholder will be liable to pay its full share of the service charge due under the lease without any exemption or cap that may otherwise be available. This may have an adverse impact on the value of the lease, particularly if other leases in the building are qualifying leases.

It is possible for a building to contain both qualifying and non-qualifying leases.  Non-qualifying leaseholders cannot be required to pay any shortfall in the service charge that may arise because of the leaseholder protections afforded to qualifying leaseholders in the same building (this liability falls to the landlord).  However, as noted above, this may have an adverse impact on the value of a non-qualifying lease.

Transaction Examples

Four common examples are set out below.

  • Example 1: Purchase of a new lease in a in a 6-storey new development. Leaseholder protections will not apply as the lease will be granted after 14 February 2022 and will not therefore be a qualifying lease. The tenant will not be a qualifying leaseholder and will not have the benefit of the leaseholder protections outlined above.
  • Example 2: Purchase (assignment) of an existing flat lease in a 6-storey granted before 14 February 2022. Leaseholder protections may apply if the lease satisfies all requirements for a qualifying lease on 14 February 2022.
  • Example 3: Purchase (assignment) of an existing flat lease in a 6-storey building granted after 14 February 2022. Leaseholder protections will not apply as the lease was granted after 14 February 2022 and is not therefore a qualifying lease (unless the lease is an extension of a lease granted before this date).
  • Example 4: Sample calculation showing application of leaseholder protection applicable to an existing flat lease in a 6-storey building in Greater London granted before 14 February 2022 where the lease is a qualifying lease and the value of the lease on 14 February 2022 is £400,000.  (gov.uk example)
    – The building requires essential non-cladding remediation works to make it safe and to date the leaseholder has paid £5,000 in the last 5 years towards interim measures such as waking watches
    – The building owner is not responsible or associated with the person responsible for creating the defect which requires remediation and does not meet the contribution condition as they do not have a net worth greater than £2 million per building they own
    – As the property is in Greater London and its value is calculated as being below £1 million but greater than £325,000 the cap on contributions is £15,000. Due to £5,000 already being paid towards interim measures, the maximum the leaseholder can now be charged is £10,000 (IE £15,000 over 10 years, minus the £5,000 already paid).

More information

Seeking legal advice at the start of your transaction will help you ascertain the existence of and, where relevant, the appropriate steps to take to claim leaseholder protections.

 

JULY 2024

 

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