Service charge liability for repairs & structural defects including cladding?

On 25 March 2021, the Court of Appeal handed down its judgment in the case of The Mayor and Commonalty and Citizens of the City of London v Various Leaseholders of Great Arthur House [2021] EWCA Civ 431. The dispute considered the purpose and interpretation of “Right to Buy” leases and whether landlords can pass on and recover the costs of repairing structural defects to the leaseholders.

Background
The leaseholders occupied their flats at Great Arthur House (a Grade 2 listed block of 120 flats, built in 1957) on the Golden Lane Estate in London under 125-year leases granted by the Corporation of London pursuant to the Right To Buy statutory scheme. The building suffered water penetration for many years causing issues with the formation of joints meaning remedial works were unavoidable.

The leases permitted the landlord to recover the costs of repairs to the structure and exterior of the building “not amounting to the making good of structural defects” and obliged the leaseholders to pay the landlord a reasonable part of the costs of carrying out “specified repairs” and insuring against risks involving specified repairs.

Issue
The landlord incurred approximately £8,000,000 in carrying out the works necessary to fix the water damage including a structural defect in the walls; removing the existing curtain wall and installing a new one, improving and making good the structural frame, new balcony doors and cladding, new sliding windows and works to the roof. The landlord sought to recover these costs through the service charge amounting to a bill of approximately £72,000 per flat.

In particular, the case concerns the issue as to the meaning of the phrase “not amounting to the making good of a structural defect” within the Right To Buy leases granted to the long leaseholders of Great Arthur House.

Procedural history
At first instance, the First-Tier Tribunal (“FTT”) focussed on the determination of the interpretation of “specified repairs” as a preliminary issue. The leaseholders argued that the words “repairs… not amounting to the making good of structural defects” did not cover these repairs. The FTT found in favour of the lessees and that the costs of the works were not recoverable through the service charge.

On appeal, the Upper Tribunal (“UT”) reconsidered the issues particularly in light of the statutory Right To Buy legislation. The Right To Buy legislation seeks to protect lessees of former council-owned property by removing the landlord’s ability to recover the costs of works associated with remedying a structural defect via the service charge. It also found that the costs of repair works that had the effect of making good a structural defect were not payable by the leaseholders through the service charge. The UT also held that the fact the works also remedied deterioration that had occurred over the time that the defect existed was irrelevant. The UT granted the landlord permission to appeal.

The Court of Appeal decision
On further appeal to the Court of Appeal, the Court of Appeal agreed with the decision of the UT with a particular focus on considering the effect of the works. If the effect of the works is making good a structural defect, then the cost cannot be passed on to the leaseholders, and the fact the works also remedy deterioration makes no difference.

Comment
This decision will be welcome news to many leaseholders who occupy pursuant to a Right To Buy lease and may be facing a substantive bill to repair the structure of their building, which is a topical issue particularly relating to the costs of remediation works associated with unsafe cladding. However, it is important to remember that, like many scenarios, the court will consider each case on its individual set of facts, in particular focusing on the ‘effect’ of specific works: this in itself will vary from case to case and may require expert evidence.

Here at Greenwoods GRM LLP, we have a range of lawyers who can advise on issues arising from this update, from pursuing or defending claims for service charge, advising on the interpretation and drafting of leases and fire safety issues. Please do get in touch.