Before we get going, it is worth remembering that those who currently have an interest in these buildings were not necessarily involved in the construction. Amongst building specialists and construction lawyers there are differing opinions about what went wrong, but where the building and flats have been sold after the initial construction, neither the new ‘building owner’ nor the individual flat owners are responsible for the problem that has come about.
How does the doctrine of estates, and how buildings and flats are ‘owned’ in England, affect the cladding problem? In the simplest arrangements in England and Wales, a building will be held on a freehold, and the individual flats are sold as leaseholds carved out of the freehold. The leases are time-limited, although this time is usually very long, typically 99 or even 999 years. The purchaser of a flat is therefore a ‘holder’ of a ‘lease’; and the lease is both a property right (the ‘estate for a certain time’) and also a contractual document that sets out the rights and responsibilities of the parties. The person who holds the ‘fee simple’ – the freeholder – will hold the shared or common parts of the building (which includes the external cladding). The freehold estate will not, however, have much capital value (relatively) because most of the value has been carved out through the sale of the leases. The freeholder promises to look after the building. The leaseholders promise to pay a ground rent (which is not uncontroversial at the moment) and also to contribute towards the costs of looking after the building through a ‘service charge’. If the leaseholder fails to pay sums demanded, this can lead eventually to the lease being ‘forfeit’, ended, and the flat unit ‘reverts’ to the freeholder, with a likely ‘windfall’ to the freeholder.
This structure leads to a number of challenges.
First, the wording of leases is not standardised. Often, they are very poorly drafted. This means that ‘one size fits all’ advice is simply impossible and what the promise to ‘look after’ the building entails, and what the leaseholder has to pay for, cannot be known without reading each lease (and often, even with legal advice, it may remain unclear). In relation to cladding disputes, the cases that have been to the Tribunal so far have found that the leaseholders are liable under the wording of the particular lease to pay for the costs of the waking watch, and for replacement cladding. Although other leases may contain different provisions, it is likely that in most instances leaseholders will be found liable to repay.
Secondly, it is difficult to see how sufficient funds can be raised to do remedial works, as recladding costs typically run into many millions of pounds. It is not possible ‘simply’ to raise the money by offering ‘the building’ as security for a loan. As mentioned, the freehold of the building will not have a large value, as most of the value is in the collective of the leases. As each flat is owned on a separate lease this collective value cannot be used as security for borrowing, even assuming that all of the flat owners were willing to take out additional loans and that there was sufficient equity left in each flat. Given the cladding problem, it may be lenders would not be willing to lend in any event.
Thirdly, if freeholders seek to raise money up-front by issuing very large service charge demands, likely to be five figure sums, many leaseholders will be unable to pay. This could, in turn, mean the start of an unhappy journey that could end in forfeiture. But unless all leaseholders do manage to pay, the freeholder may not have enough money to do the work.
Fourthly, as ground rents provide a long-term secure income stream, they are often sold on to investors who are interested not in property management but in financial assets. That will generally result in the freehold being in the hands of a ground-rent investor who may be based overseas. The Landlord and Tenant Act 1985 (section 1) requires a landlord to inform leaseholders of his/her/its name and address where s/he/it is the leaseholders’ immediate landlord. Unfortunately, however, that is not the case for a freeholder landlord if there is an intermediate lease between the leaseholders and the freeholder. Leaseholders may therefore be unsure about who owns the freehold.
Lastly, ‘ownership’ arrangements in residential and mixed residential/commercial blocks can be considerably more complex and involve more parties than just an individual freeholder/landlord and leaseholders. The ‘freehold’ may be owned by an investor, or by the flat leaseholders collectively through a company, or by a subset of flat leaseholders.
Further, if the leaseholders have exercised their statutory right to acquire the right to manage the building, the management function may be exercised by a ‘right to manage’ company (‘RTM’) – and this company may again be owned by all, or a subset of leaseholders.
Requiring building owners to do the right thing sounds appealing but when we unpick it, we see that ownership is often like the ‘emperor’s new clothes’. Moreover, the current owners have often not created the problem. In the next blog I will consider what this means for the LA powers under the Housing Act 2004.
How to cite this blog post (Harvard style)
Bright, S. (2019). Part 1: Building owners and the cladding problem: Some basic land law. Available at: https://www.law.ox.ac.uk/housing-after-grenfell/blog/2019/02/part-1-building-owners-and-cladding-problem (Accessed [date]).