Q&A: Untangling a building safety conundrum

Oliver Park and Brooke Lyne look at the retrospectivity of Schedule 8 of the Building Safety Act 2022 Question Does Schedule 8 of the Building Safety Act 2022 have retrospective effect? Answer Recent analysis from the Upper Tribunal states that the provisions of Schedule 8 to the Building Safety Act 2022 are, to some extent, retrospective in their effect. Unpaid sums that fell due or were demanded prior to 28 June 2022 for service charge items that are now caught by those provisions cannot now be collected. Explanation Schedule 8 to the Building Safety Act 2022 contains protections designed to prevent certain service charge costs relating to building safety defects in high-rise buildings from being charged to leaseholders. For example, so-called “qualifying leaseholders” are not liable to contribute towards the costs of cladding remediation. There is also a restriction preventing qualifying leaseholders from contributing towards the costs of professional services incurred in relation to relevant defects. A source of uncertainty since the legislation was enacted was the extent to which these service charge protections operated retrospectively and, in particular, whether they applied to sums incurred or demanded prior to the commencement of the relevant sections of the Act on 28 June 2022. The position taken by Michael Gove in a letter sent out to the property management industry on 27 June 2022 firmly stated that the provisions operated retrospectively. But the position is far from straightforward, particularly given that there is no express provision in the legislation stating that restrictions on service charges introduced in Schedule 8 would apply to costs and service charge demands pre-dating the commencement of the 2022 Act. Indeed, in a first-instance decision of the First-tier Tribunal, Adriatic Land 3 Ltd v Residential Leaseholders of Waterside Apartments (MAN/30UG/LSC/2021/0044), Judge Holbrook came to the view that Schedule 8 did not affect the “payability of past (pre-commencement) service charges” for precisely this reason. The recent decision of the Upper Tribunal (Lands Chamber) in Adriatic Land 5 Ltd v Leaseholders of Hippersley Point [2023] UKUT 271 (LC); [2023] PLSCS 189, however, came to the opposite conclusion. Hippersley Point was an appeal resulting from a decision under section 20ZA of the Landlord and Tenant Act 1985 to grant the landlord dispensation from the need to consult on major building safety works. Dispensation was granted by the FTT, but with a condition attached barring the landlord from recovering the costs of the application from the leaseholders as a service charge. By its appeal the landlord argued that the dispensation should have been unconditional. At the permission stage, the UT raised a new point, namely whether the landlord was barred from recovering its costs relating to the dispensation application against qualifying leaseholders due to the provisions of Schedule 8 of the 2022 Act in any event. Paragraph 9 of Schedule 8 provides that no service charge is payable by a qualifying leaseholder for “legal or other professional services relating to the liability (or potential liability) of any person incurred as a result of a relevant defect”. The landlord’s argument in response to this point was twofold: it said that the costs of the dispensation application were not within the scope of paragraph 9 as a matter of statutory construction; and that even if the costs were within scope, then they were incurred before paragraph 9 came into force and so the exclusion on recoverability did not apply. Following a thorough analysis of the language and purpose of the scheme, the UT rejected both these arguments. The judge held that the costs of the dispensation application were caught by paragraph 9 given the broad language that had been used. The effect of paragraph 9 was that relevant costs incurred or demanded prior to 28 June 2022 were no longer payable from that date. As noted by the UT, the decision has some potentially unfair consequences. Landlords who did not enforce the payment of relevant services charges prior to 28 June 2022, perhaps because they were hoping to obtain third-party funding for works, have lost the chance to do so. Leaseholders who paid promptly before 28 June 2022 are in a less fortunate position than those who withheld payment, even where, at the time, there were no legal grounds for withholding service charges that had been demanded. While Mr Justice Johnson was conscious of these peculiar outcomes, he stated: “What might be seen as unfair results are, it seems to me, simply a reflection of life in the new world of the 2022 Act.” The impact of this decision cannot be overstated. The costs of applications for dispensation, relating to relevant building safety defects, will be caught by the restriction on recovering legal and professional fees contained in paragraph 9 of Schedule 8. Landlords considering pursuing costly applications for dispensation will need to bear this in mind. Furthermore, the decision will have the practical effect that landlords will have to write off substantial unpaid service charge costs even if they fell due prior to 28 June 2022, where the Schedule 8 restrictions apply. What the decision does not do, however, is provide tenants with a route to challenge sums demanded and paid for in relation to relevant building safety measures prior to 28 June 2022. Nonetheless, it may be possible for some leaseholders to recover sums paid by applying for remediation contribution orders. Oliver Park is an associate in the real estate disputes team at Charles Russell Speechlys LLP and Brooke Lyne is a barrister at Landmark Chambers Photo © Peter Manning/LNP/Shutterstock