Cladding remediation has few easy answers

The recent Budget signalled an end to austerity, with the Treasury promising a wave of borrowing and funding for public services and projects. In an announcement overshadowed by coronavirus, more money was also made available to address one of the most pressing issues facing the property market – that of remediating cladding on Britain’s thousands of multi-occupancy residential buildings. To date, the government has pledged £600m to replace aluminium composite material (ACM) facades – the kind in place at Grenfell Tower – including the £200m fund which was launched for private blocks last year. But as the chancellor himself admitted, more money is needed.  The government should be applauded for heeding those calls – in the form of a new £1bn fund for the remediation of all combustible cladding. This is a welcome increase in funding and a much-needed expansion to cover non-ACM materials. However, while a positive step, it is still in danger of falling short. For example, one housing association has projected the cost of remediation for its stock to be £450m, while others are rightly concerned the new fund does not cover buildings under 18m tall that are also likely to need rectification.  Further detail on the new fund is scant, and the information we do have poses a number of questions. These include issues around access to the fund – which could have unintended consequences for leaseholders and building owners – and on insurance policies.  Who pays?  The devil is in the detail. In the Ministry for Housing, Communities and Local Government’s supplementary material, it states that, in the private sector, grants will be “for the benefit of leasehold owners” of flats. This may mean that private building owners cannot profit from the fund, it must be applied to leasehold flats. However, it may be a potentially significant departure from the way the previous fund was operated. So far, freeholders and building owners have been charged with responsibility for funding remediation and have frequently sought to recoup the funds from leaseholders via service charges. However, it now isn’t clear whether the latest government wording means homeowners must apply for a grant from the fund individually. If that is not the case, how do leaseholders benefit where the buildings owners do not apply for funding? What’s more, where building owners have already funded remediation and sought recovery from leaseholders, as many have, does this mean that the contractual right to recover costs is now void?  Whatever the ultimate answer, the new wording adds a layer of uncertainty, which could require interrogation at tribunal level and only add complexity to the difficult process of establishing and collecting funds to make sure buildings are safe. Claims against third parties As in the previous fund, there is a requirement for building owners to pursue warranty claims and take appropriate action against those responsible for designing and installing the original cladding.  The government is keen to stress that it is a condition of funding that building owners must pursue warranty claims and appropriate action against those responsible for putting unsafe cladding on these buildings, and to repay recovered money to the government.  The Manchikalapati and ors v Zurich Insurance plc (t/a Zurich Building Guarantee & Zurich Municipal) and East West Insurance Company Ltd [2019] EWCA Civ 2163 case – known in the industry as Zagora – provides helpful guidance on how policyholders may recover monies under structural warranty insurance policies. However, many of these policies exclude cover for rectification of defects where there has been no physical damage. Zagora also established that claims against building control are, in the majority of cases, going to fail.  This leaves claims against constructing parties, of which design-based claims have better prospects of making a recovery given the designers should be backed by insurance. Insurance needs assurance  The market for these types of claims is already developing and claims under professional indemnity insurance (PII) are proving to be long and complex. What steps must be taken to satisfy the government requirement to pursue is not clear, but it is likely that substantial costs will be added to the bill facing building owners.  An added complication is that, where owners are pursuing design or supervision claims under PII, those relating to cladding may be excluded. That is because policies work on a “claims made” basis, ie the date when the claim is made to the insurer is the date that counts, not the date of damage. Certain policies have already put in “cladding exclusions” that could knock out certain elements of claims for which the fund is available (though those relating to missing cavity barriers or fire stopping, etc are often still covered).  It is therefore important to give notification to potential defendants as soon as possible (a) to ensure that the policyholder does not fall foul of notification conditions and (b) to try and benefit from the widest possible insurance cover. Such claims will, of course, only increase the pressure on the insurance market, which is already shrinking rapidly away from the construction industry.  A stepping stone  Despite the government’s assertion that the latest fund is the “limit to the government’s funding for remediation” it feels far more like a step in the right direction than it does a solution.  Questions remain – and the government needs to bring forward the detail of its fire safety and building safety bills so that those carrying out remedial works know that they will be in line with new requirements.  While it’s welcome to see the government taking the challenge of cladding remediation seriously, there is a long way to go before the issue is fully resolved.  Charis Beverton is a senior associate at Winckworth Sherwood