LGA position statement on leaseholder costs

• 1. In May 2018 the Prime Minister, Theresa May stated that the costs of remediating dangerous cladding systems in privately-owned blocks should not be passed on to leaseholders. In the two-and-a-half years since then £1.6 billion has been pledged to remove dangerous cladding, many buildings have been remediated and the Government has devoted great efforts to addressing the cladding crisis and reforming the system that caused it. Yet for all the positive work undertaken, the number of residents affected continues to grow. 
• 2. The building safety system in England has failed over a period of decades, under governments of all political persuasions and with widespread and devasting consequences. The LGA is well aware of the complex and daunting nature of this problem and wants to work with the Government to move towards a solution. This will require a new approach if we are to avoid risking not only the safety and mental health of hundreds of thousands of residents, but significant economic damage.

Size of the problem

• 3. We know that 2,820 buildings have applied to the Government fund set up to remediate buildings over 18m high with dangerous non-ACM cladding. When combined with the 369 residential buildings over 18m that have ACM cladding, this suggests that some 25 per cent of the approximately 12,000 residential buildings over 18m have dangerous cladding systems.
• 4. Government estimates that there are 76,000 residential buildings between 11 and 18m in the country. We do not know how many of these buildings have similar issues but if just 4 per cent of buildings between 11 and 18m in height need remediating, this will roughly double the total number of buildings affected.
• 5. The funding available to date, though welcome, comes nowhere near the amount required. The Housing Communities and Local Government Select Committee concluded that the funding made available to date for the remediation of non-ACM dangerous cladding on private blocks over 18 million would only remediate 600 buildings, less than a quarter of the blocks that have applied. [1] There is currently no financial provision to meet the cost of remediating buildings under 18m.
• 6. Approximately 43 per cent of the ACM-clad residential buildings over 18m have been remediated.[2] The proportion for non-ACM buildings is far lower. This suggests that at the current rate of progress it will take well over 20 years to remediate all the residential buildings over 18m (The Sunday Times has suggested 150 years).

Consequences for leaseholders

• 7. We have not yet begun to address remediating the majority of problem buildings and this issue is not going to be resolved quickly. Yet until the buildings with dangerous cladding systems are fixed, those who own flats in them face spiralling costs. Increases of up to 800 per cent have been reported in insurance costs. Even with the help on alarm system costs announced in December, many residents have already seen ongoing costs of safety measures that can run into five figures and will continue to face these costs until the new fund comes into operation (£30m is unlikely to cover the cost of installing alarms in all affected buildings). Meanwhile they are unable to sell, remortgage or increase the share of the homes they own, many of which are now valued at zero.
• 8. Most importantly they are living in buildings that are dangerous, with all the fear and anxiety that produces. The long-term mental health impact of prolonged anxiety about their safety and the financial security on thousands of people must not be underestimated. Without a solution, the health and social consequences will be long-lasting.
• 9. Many leaseholders are now in their fourth year of enduring these conditions, on top of which the prospect of an unaffordable remediation bill hangs over them. The Government has previously estimated that remediating 1,700 buildings would cost £3-3.5 billion, suggesting £1.75 million - £2 million per block. [3] £269 million of the Government’s £400 million social sector ACM remediation fund has been approved for the remediation of 140 buildings, suggesting average costs at the higher end of this estimate and the LGA has previously demonstrated that individual blocks can cost far more. Bills of £100,000 per flat (nearly 50 per cent of the value of the flat in question) have been reported in the private sector.

The case for supporting leaseholders

• 10. The industry and the Government must take responsibility for the consequences of their failings. The primary cause of the cladding crisis is the shortcomings of government guidance on building safety. Approved Document B, government-issued guidance on complying with the building regulations, was unclear on key points in relation to preventing the external spread of fire prior to 2017. It has been shown the process of conducting the safety test applied to cladding systems (the BS 8414 test) can be manipulated and it takes too little account of real-world conditions. Given the evidence heard this year at the Grenfell Tower inquiry, it seems increasingly likely that these factors were deliberately exploited by some dishonest actors in the industry and that other key players were incompetent and/or negligent – with lethal results.
• 11. It is unjust to leave leaseholders to bear the cost of remediation. Leaseholders bought their property in good faith, unaware of the failure of the regulatory system for building safety, or the possibility that some product manufacturers were misrepresenting dangerous materials as safe. Unlike the product manufacturers, contractors, developers and designers who had a responsibility to know what the building regulations required and to deliver buildings that complied with them, leaseholders are blameless. In most cases freeholders are equally innocent, having also purchased freeholds in good faith, with no responsibility for compliance with the building regulations. In fact, often the freehold is owned by the leaseholders.
• 12, The law makes freeholders generally responsible for fixing fire safety flaws on their buildings, but allows them to pass the cost on to leaseholders. It is time to recognise that this legislation was not designed to address the consequences of incompetence or irresponsibility on an industrial scale, the fundamental failure of an entire regulatory system, or bills that are out of all proportion to what leaseholders can be expected to afford.
• 13. Leaving the current legal system to deliver justice for leaseholders and hold the guilty to account is not going to work. Some freeholders are taking legal action to recover costs from developers responsible for the state of buildings. This is to be applauded; but where freeholders do not act, it is very difficult for leaseholders to take joint legal action against developers, because of the number of people that need to act in unison. Even if leaseholders can organise in this way, the developer may go out of business without paying a penny. As the Grenfell Tower Inquiry is demonstrating, establishing who in the lengthy and complex hierarchy of contractors, sub-contractors and consultants is actually responsible in law is not necessarily a straightforward matter.
• 14. Not only is it unfair that leaseholders should be made to pay, it is economically damaging to try and force them to. The cost of major safety works such as the replacement of cladding systems is likely to be beyond the means of most leaseholders. This means that attempts to make leaseholders pay are likely to make them default on their mortgage and become homeless, with all the social cost that this entails, leaving still-dangerous, now empty, blocks behind them. Even if only a few leaseholders are bankrupted by the cost of remediating a block, this will still either prevent the work from taking place or increase the burden on other leaseholders, potentially creating a chain-reaction of mortgage default.
• 15. The cladding crisis is also affecting leaseholders whose buildings’ cladding system is safe, because mortgage lenders are demanding leaseholders obtain a form (known as EWS1) proving their cladding system is safe before they can sell, remortgage, or increase the share of the property they own. At the same time insurers are refusing to cover surveyors to sign off the forms, making them hard to obtain. The consequence is that mortgage lenders are effectively forcing borrowers onto the most expensive mortgages once their initial attractive deals come to an end, in full knowledge that the borrowers cannot switch to another lender. Altogether it is estimated that 860,000 leaseholders live in buildings with cladding systems. Lenders must be prevented from exploiting this captive market.
• 16. The scale of the cladding crisis could well be large enough to seriously damage the housing market and pile yet more pressure on the post-COVID economy. The EWS1 problem is preventing many leaseholders selling their flats, meaning tens of thousands of flat owners who would otherwise be looking to upgrade to a family home will instead be unable to move, preventing those from whom they would buy their next home from moving on in turn.
• 17. The LGA is concerned by the prospects set out above because it will fall to our members to pick up the pieces as homeowners are made homeless and dangerous buildings left unfixed, a blight on our towns and cities – and because we fear the widespread sense of injustice that will remain in our communities for years to come, in particular where the recent developments that have been touted as regeneration become sources of regret and symbols of national failure.

What needs to be done

• 18. The only solution is to make the building safe. While the new funding for the relief of waking watch costs is welcome, this only addresses part of the problem.
• 19. Enforcement action alone cannot solve the problem. Councils and fire services can take enforcement action to force owners to fix their blocks and fine them if they do not and such enforcement may have a significant part to play in driving action. However, this will not be a quick process - and without funding, owners are unlikely to pay up-front costs they either cannot recover from leaseholders or will only be able to recover by repossessing flats whose owners have defaulted on the lease. For some owners, passing assets to increasingly obscure offshore ownership or simply abandoning them will make more sense than remediation, because the cost of remediating the block far outstrips the any income or capital receipt from selling the freehold.
• 20. Instead of these damaging outcomes, the LGA believes that the Government needs to pay the upfront costs of remediation and to set a clear and realistic timetable for owners to act.
• 21. It should then seek to recover as much as possible of that cost later from those responsible, either through pursuing legal action against specific developers or product manufacturers or through a levy on the relevant parts of the industry. It is particularly important that where firms are found to have acted dishonestly, the individuals responsible are held to account and not allowed to walk away with the profits of their dishonesty at the expense of the lives lost at Grenfell. To allow this would be a gross injustice.
• 22. Given that government is unlikely to be able to recover the full cost of remediating thousands of buildings by the above methods, there are other steps that might help reduce the cost to the taxpayer:
  • 22. 1. There may be a number of buildings whose cladding systems are technically non-compliant but where expert opinion deems the building safe without expensive interim measures and allows the cladding to be removed as part of scheduled maintenance work rather than immediately remediated, because the amount of flammable material is so small in relation to the design of the building. However, the Government must ensure that these buildings remain insurable.
  • 22. 2. Where buildings are unsafe, interim measures cannot be relied upon indefinitely and owners must be made to remediate the building, through enforcement that sets clear and reasonable timelines. The Government must ensure through regulation that this can be done in the most cost-effective manner, taking a risk-based holistic approach to the building. For example, it may be that sprinkler provision is cheaper and as effective as replacing cladding. Such judgements can only be made by experts. Again, if the result is safe but technically non-compliant, residents’ problems can only be solved if the property is insurable.
  • 22.3. Neither of the above approaches can be an excuse to leave buildings in a dangerous state and independent expert verification of their safety will be required.
• 23. In addition to funding remediation, Government needs urgently to address the question of insurance. If buildings are remediated in a cost-effective manner, or allowed to remain in a non-compliant but safe state, they must be insurable. It is also important recognise that it is going to take several years to fix buildings. At the current rate we estimate this will take 20 years, so even a significant acceleration is likely to see some buildings spend five years in interim measures. During this period insurance costs must be brought under control if properties are to be mortgageable and the housing market protected. The Government needs to either create a pool approach to insurance along the lines of the Flood Re scheme that spreads the cost of flood insurance across the market to protect individual homeowners or to underwrite the building risk more directly.
• 24. The longer the question of who pays is left unresolved, the longer the process of remediation will drag out with all the additional costs set out above.Conversely with remediation costs covered, work will accelerate in most cases with enforcing authorities free to concentrate on the minority of rogue owners; insurance and mortgage risks will be reduced and interim measures will become unnecessary; the housing market will be free to play its part in economic recovery.
• 25. We call on the Government to:
  • 25. 1. Re-commit without delay to protecting leaseholders, extend this support to social housing, in order to avoid the need to increase rents to pay for the remediation works and make it clear that this means funding the remediation of all dangerous cladding systems in residential blocks over 11m.
  • 25.2. Commit to begin assessing buildings under 18m no later than the end of 2021. Fire and Rescue Services are currently on course to consider every residential building over 18m by the end of 2021. Once that process is complete, the aim should be that high priority buildings under 18m should be considered in 2022, with a return to business as usual Fire and Rescue Service inspections during 2023 (most lower priority residential buildings would not normally receive fire service inspections). This will require continuation of the funding available for the current programme into 2022-23.
  • 25.3. Instruct owners of all buildings with cladding that they must establish the materials used in their systems as soon as possible. We know there is a shortage of assessors who are insured to conduct fire risk assessments for buildings over 11m, but this must not become an excuse for owners to do nothing to establish the basic make-up of their cladding systems.
  • 25.4. Set owners clear deadlines for remediation work. [4] It is not the role of the LGA to say what these deadlines should be but, bearing in mind the point above, we suggest the need for a target time limit between:
    
    a) the identification of a problem and the commencement of work; and
    
    b) the identification of a problem and the completion of work.
    
    We suggest that owners should be instructed to proactively approach regulators and government if they do not think they can meet the target and that a robust approach to enforcement should be demonstrated where owners fail to act or to ask for help - in particular the issuing of improvement notices with financial penalties for owners. In setting targets, Government will need to consider capacity in relation to the number of buildings and the need to avoid shoddy, rushed work.
  • 25.5. Continue monitoring the capacity of the relevant professions to identify barriers to this timetable and quickly institute the training and recruitment necessary to resolve them (and resolve any professional insurance issues).
  • 25.6. Establish a task force to take forward legal action against those responsible for the cladding crisis AND/OR commit to a levy on the relevant parts of the building industry in the next budget.
  • 25.7. Commit to establishing a residential building safety equivalent to Flood Re by the end of 2021.
  • 25.8. Push forward with the establishment of the Building Safety Regulator and the system proposed in the Building Safety Bill to ensure we cease to build bad buildings.
• 26. This should enable the overwhelming majority of buildings with dangerous cladding systems to be remediated in the next five years. Many will say that taking most of a decade to resolve the issues exposed by Grenfell is far too long. We suggest that without a concerted and focused effort it will take much longer, cost much more and leave a far more damaging legacy. That would be unacceptable.
• 27. Unless these measures are taken - or some better approach to achieving the same ends developed – the current crisis will drag on without an end in sight. Not only would that be a grave injustice to leaseholders but a cause of greater economic damage than recognising the problem and facing up to it now. The LGA believes it is a matter of when these measures are adopted, not if – and the sooner the better.

Footnotes

[1] HCLG select committee report on remediation, paragraph 25.

[2] Excluding student accommodation and hotels.

[3 ]MHCLG evidence to the select committee, Q35.

[4] The Housing Communities and Local Government Select Committee Report on remediation called on the Government to ensure that all buildings of any height with ACM cladding should be fully remediated of all fire safety defects by December 2021. Buildings with other fire safety defects, including non-ACM cladding, should be remediated before the fifth anniversary of the Grenfell Tower fire in June 2022.