RTM companies and improvement notices after the Building Safety Act

A recent First Tier Tribunal (FTT) case, Priory Heights v Central Bedfordshire Council, contains important lessons for local authorities relating to the service of improvement notices by a local authority. The case involved a 1970s office block that was ‘poorly converted’ into  residential use with 64 flats.  The freeholder/landlord, Goldvalley Management Ltd, had bought its interest after the grant of the leases and although it was a party to the proceedings it did not take an active part. A Right to Manage (RTM) company was formed shortly after the current landlord’s acquisition.  As there was an RTM company, the Council had been advised that the notices needed to be served on the leaseholders. The leaseholders appealed and the FTT agreed that the notices should not have been served on them.

Of particular note is the interaction of the housing, health, and safety rating scheme in the Housing Act 2004 (HA 2004) with the Building Safety Act 2022.  The FTT is critical of the Council’s failure to consider the HHSRS Enforcement Guidance on how the works might be funded by the leaseholders, and of whether any other enforcement action was more appropriate. The improvement notices, which were lengthy and required extensive works, were served in April and May 2022. Around this time the Building Safety Bill was in the final stages; it received Royal Assent on 28 April 2022. The BSA involved significant policy shifts introduced at a very late stage; and, relevant to how the FTT viewed the Council’s action, it provides protection from remediation costs for many leaseholders and adds more enforcement tools to a local authority’s toolbox.

Following an inspection conducted by the Joint Inspection Team of the Local Government Association at the Council’s request a report in March 2022  assessed the building as a category 1 risk. Under the HA 2004, if the LA considers there is a Category 1 hazard there is a duty to take enforcement action (s. 5), which could be an improvement notice (s. 11) or a prohibition order (s. 20). The Council met with the managing agents and explained that it would be serving improvement notices on all leaseholders, not the landlord or the RTM company. The FTT considered this meeting not to be a discussion with the agents, particularly about the timetable, but informing them of its decision. Remediation required removal and replacement of HPL cladding on an external staircase, addressing compartmentation issues and various fire stopping matters. The improvement notices required this remediation work to be completed within a year, by 6 April 2023.

The FTT was alive to the complexity of remediation and of the funding challenges, noting the administrative difficulties and time-consuming nature of Building Safety Fund applications. Although the property had been registered with the Building Safety Fund in July 2020, its potential eligibility for funding was only confirmed in October 2021; but it appears that only much later did it become clear that the internal compartmentation works would not be funded.  This would mean that alternative sources of funding would need to be found.

Why was it wrong to serve improvement notices on all of the leaseholders?

Under the HA 2004, the improvement notice should be served on the person who is the ‘owner of the specified premises’ and, in the opinion of the LA, ‘ought to take’ the remedial action (HA 2004, Sch 1, para 4). An ‘owner’ can be both the freeholder and any relevant leaseholders (with unexpired terms of more than 3 years) (s. 262(7)). Sch 1 Para 4(3) further states that the ‘owner’ of common parts includes any owner of the building or part of the building or (in the case of external common parts) of the particular premises in which the common parts are comprised. As Martin Rodger QC, Deputy President observed in an earlier Upper Tribunal case, Hastings BC v Braemar Developments Ltd, an RTM company cannot be the recipient of an improvement notice. This is so even though they may be the very parties upon whom the law imposes responsibility for maintaining and repairing the internal and external common parts of a building. The options would therefore be to serve it on the freeholder or leaseholders. This takes us to the question of who ‘ought’ to take action.  

In Hastings BC the Upper Tribunal said that in deciding who to serve, the local authority ‘will wish to have regard to the practicality of compliance with the notice’. Given that the freeholder has no power to undertake works or recoup costs where an RTM company controls the management of the building, the ‘better course’ may be to serve the notice on the leaseholders who are members of the RTM and so collectively control it. The RTM company can ordinarily then recoup the expense under the terms of the leases. As this issue was not relevant to disposal of the appeal in Hastings BC, these comments were obiter. This is what the FTT returned to in Priory Heights.

In Priory Heights, the FTT took account of several factors that made it inappropriate to serve improvement notices on the leaseholders. First, given the mitigation measures already taken, the further cladding remediation was ‘less urgent than might otherwise be expected’, and the compartmentation issues were not ‘significant potential contributors to major fire spread’. Second, the likely effect of the BSA is that the RTM will not be able to recover the costs (at least in full) from the leaseholders in contrast to Martin Rodger QC’s assumption (predating the BSA) in Hastings BC. Most, or some, of the leaseholders will be qualifying leaseholders (around one third of the original 37 applicants - more were later added - were owner-occupiers, and it was likely that many others would have no more than two other dwellings). This means that they will be protected under Sch 8 from paying remediation costs in relation to cladding, and have at last partial protection in relation to the other costs. As most flats were also likely to have a  value of less than £175,000 this would also prevent remediation costs from being recovered from qualifying leaseholders.  Third, the form of the notices served in Priory Heights required each leaseholder to carry out the works whereas a collective response was needed, and the Council had not explained how the RTM company could collect the funds. No details of membership of the RTM company were available and the liability of members is limited to £1.

The FTT was clearly of the view that if an improvement notice was necessary it should have been served on the landlord, assuming the RTM company would agree a workable scheme with the landlord to procure the work. It also hinted that a better course of action would have been for the council, as an ‘interested person’ under sections 123 and 124 of the BSA, to apply for a remediation order against the landlord or a remediation contribution order against the landlord and/or others. The FTT assumed that the landlord would have sources of income from telecommunications equipment on the roof, ground rents, and potentially premiums for lease extensions.

Even if it had been otherwise appropriate to serve the improvement notices on the leaseholders, they should have been given more time to pursue the BSF application for the cladding work and time to investigate other sources of funding for the work not covered by the BSF.

Concluding observations

Although the FTT is critical of the council’s approach, there may be an element of hindsight involved. The changes in the BSA were rushed through at the time that the Council would have been preparing the improvement notices. There are, however, powers to vary or revoke improvement notices and given the seismic changes to policy that occurred it would have been wise for the Council to reconsider. The references to remediation orders and remediation contribution orders are interesting; these are largely untested at the moment and so it is not clear how the FTT will approach the exercise of its very broad discretion. Although it is clearly wrong to read anything into the FTT remarks as the point had not been argued, it may be a sign that the FTT will be keen to look to non-leaseholders to take some responsibility in these cases through the use of such orders.  As with so many buildings, the way forward for Priory Heights remains unclear.