Construction of Leases: Contractual Liability to Pay for Cladding, Waking Watch, and Fees

Since the earliest First Tier Tribunal cases on fire safety – Citiscape and Cypress Place and Vallea Court – it has been recognised that under most leases the costs of interim fire safety measures and remediation works can be passed onto leaseholders. It is possible to challenge payment under the Landlord and Tenant Act 1985 s 19 if the costs are not reasonably incurred and not to a reasonable standard (see Radcliffe Investment Properties Ltd v Meeson – waking watch not payable as not reasonably incurred, and Assethold Ltd v Adam - costs of waking watch costs reduced by 50% as not to a reasonable standard). Additionally, there are now protections from costs for some leaseholders under Sch 8 of the Building Safety Act 2022 (BSA). However, the starting point to determine recoverability must always be to look at the underlying contractual liability. 

This post looks at a recent FTT decision, 156-176 St John St. A social housing provider, Riverside Group Limited, held head leases of two blocks in a mixed-use development. In 2020, expert reports revealed there was flammable ACM cladding and defective fire stopping with missing cavity barriers. The development was not tall enough to qualify for government funding. A waking watch was in place for a couple of months, remediation works began in June 2021 and were completed by February 2023. The Tribunal held Riverside liable to pay to its landlord (the freehold company, St John Street Property Services Ltd) cladding costs, waking watch costs, managing agents’ fees, and (some of the) fees for legal advice. A further decision in relation to permission to appeal and costs recovery was made on 25 September 2023 but is not available online (case reference LON/ooAU/LSC/2021/0255).

There have been relatively few FTT cases on payability, but in these Tribunals generally (with some exceptions, such as the Ironworks decision) find costs to be payable under the lease terms. This post discusses three aspects of St John St (there is much more in it). First, whether the lease permits recovery of remediation costs through the service charge. Second, whether the landlord’s failure to pursue third party litigation prevents recovery on the grounds that the costs were not reasonably incurred. Third, whether the potential for a remediation contribution order impacts on payability.

Construction of lease terms

Riverside’s service charge obligation was to pay a proportion of the landlord’s costs in providing the defined ‘Property Services’. These services include an obligation to ‘keep in good and substantial repair and condition…the exterior and main structure of the Property’. The FTT held that the costs of cladding remediation works were recoverable under this provision because of the reference to ‘condition’.  The FTT agreed that to come within the repair obligation there must first be ‘disrepair’ and that as the ACM cladding was in ‘very good condition with no sign of physical damage or deterioration’ this remediation work would not count as ‘repair’. However, the reference to ‘condition’ made the covenant ‘conceptually different’ from one referring only to repair, and drawing on Credit Suisse v Beegas Nominees Ltd [1994] 1 EGLR 76 the FTT in St John St took the view that the building was not in a safe condition for occupants as there was a severe fire risk. In Credit Suisse the landlord’s obligation was to ‘keep in good and tenantable condition’ (emphasis added). Mr Justice Lindsay said this meant that the premises were to be judged by what were ‘the requirements as to condition of the hypothetical reasonably-minded tenant of the class likely to take that building’.  In St John St the FTT noted that Riverside is a social housing provider whose ‘main, maybe only, function is to provide safe homes for people to live in; and the “condition” which it would require for those parts of the Development that they had taken by way of head lease, is that the building is in a safe condition for those occupants.’ A similar approach had been taken by the FTT in the Citiscape case. The FTT there also referred to Credit Suisse but focussed not on the needs of occupiers per se but stated that it could ‘not see how the two blocks can be said to be "in good and substantial repair order and condition" whilst the cladding remains a fire risk’ [58].

It is easy to see why Tribunals may want to hold landlords liable to remediate; in St John St the FTT said that ‘if the boot had been on the other foot and the landlord was refusing to remedy obviously dangerous cladding, it is hard to imagine [Riverside] accepting the position and not seeking to enforce the landlord’s obligation’ [81]. Nonetheless, although the construction of repair covenants is notoriously difficult and cases can be difficult to reconcile the Court of Appeal held in Post Office v Aquarius Properties Ltd that an obligation to keep the whole and every part of the premises in good and substantial repair does not require a design defect to be remedied in the absence of deterioration or physical damage Why is a different approach taken to the obligation to keep the exterior and structure of the property in ‘good condition’? Cladding systems are not ‘out of condition’ even though they are not fit for purpose, and in St John St itself the Tribunal stated it still appears in ‘very good condition’.

Further, in Credit Suisse the key phrase that Mr Justice Lindsay focussed on was ‘tenantable’ condition; this was absent in St John St. Tribunals refer frequently to Lord Neuberger’s approach to construction in Arnold v Britton, including the need to have regard to the overall purpose of the clause and the lease.  In Citiscape the Tribunal noted that the grant of 999 year leases meant that the freeholder ‘was effectively relinquishing any capital interest in the flats’ and it ‘was reasonable to conclude that the parties would have intended that all future costs associated with the blocks would be the responsibility of the tenants’ [62].  In Arnold v Britton Lord Neuberger also, however, cautioned against hindsight [20], and emphasised ‘the importance of the language of the provision which is to be construed’ [17].  The ‘boot on the other foot’ argument has strong appeal, but the job of courts is to interpret the words used. In so far as there may be a concern to impose a clear obligation on the landlord to make buildings safe this will become easier with the passage of the BSA in relation to ‘higher-risk buildings’. This imposes a statutory duty on ‘accountable persons’ (often the landlord) to manage building safety risks (s 84) and (when brought into force) s 112 will also insert an implied landlord covenant into leases mirroring this where the landlord is an accountable person for a higher-risk building.

Other clauses in the lease may also permit recovery of remediation and interim costs. In St John St the Tribunal noted that the work would also come within the reference to ‘maintenance’, which had a wide meaning in the particular lease, and works required to comply with statutory and other requirements and in connection with the prevention of fire.

In relation to the costs of waking watch, the Tribunal held that these came within the reference to ‘works’ (‘all works required to ensure that the Property complies with all statutory or other requirements’). Again, it approached interpretation purposively, stating ‘that the word “works” should be construed widely as meaning “works, endeavours or activities” rather than only physical work; and to do so does not stretch the natural meaning of the word in the context of this lease’ [111]. The Tribunal also considered that waking watch could come within other lease provisions:  a ‘form of continuous inspection’ (!), staff considered ‘necessary for efficient and economic management of the Property’ (noting that insurance may have been withdrawn if they did not provide a waking watch), and the sweeping up clause (‘reasonable acts costs and things done for the efficient running of the property and the benefit of the occupiers’) [112].

Third party litigation

Riverside also argued that the costs were not ‘reasonably incurred’ as the landlord had failed to take sufficient steps to establish whether third-party funding would be available to pay for the remediation. This might be through guarantees, warranties, or through litigation against the contractor for breach of contract or under the Defective Premises Act 1972 s 1. The Tribunal disagreed, considering that the landlord had taken sufficient steps to establish whether third-party funding was available to meet the remediation costs and found that it was not so available [141]. In relation to litigation, the Tribunal did not accept that a landlord can be required to litigate as a precondition to recovery of service charges, given the speculative outcomes, time-consuming nature and costs of litigation[143]. The Tribunal noted that, when in force, section 133 of the BSA will give the Tribunal jurisdiction to disallow recovery of remediation costs if ‘just and equitable’ if the landlord fails to take reasonable steps to recover from third parties.  The government consulted about statutory guidance on this in February 2023, and draft (undated) guidance is available here.

Is the possibility of a remediation contribution order relevant?

Counsel for Riverside also argued that the possibility that Riverside could apply for a remediation contribution order (RCO) against the landlord pursuant to section 124 of the BSA should lead to a reduction or extinction of the service charge costs payable by them. A RCO can be granted if the Tribunal considers it ‘just and equitable’ and Riverside provided a solicitor’s letter of claim explaining why it would be just and equitable. Interestingly, the Tribunal notes that there were strong grounds for Riverside to apply for an RCO against both the landlord and the developer but the Tribunal was not able to pre-judge any such application.

Overall remarks

The St John St decision discusses the payability issue in more depth than many Tribunal cases and reflects on the relationship between this issue and the new provisions in the BSA. When these leases were drafted no thought was given to how they would apply to the kind of issues arising from the fire safety crisis; ensuring that someone is required to remediate, and addressing questions as to who should pay for this. The remark about the ‘boot on the other foot’ is also interesting as it hints at the difficulties facing Tribunals. As with many cases the Tribunal adopts a ‘belt and braces’ approach to the construction of lease terms noting several potentially relevant leasehold clauses that may enable the landlord to recover costs.