Lending against cladded buildings 

21 Feb 2023
Bhavini Kalaria

Residential Property

With news that the six largest lenders in the country will be offering mortgages on medium and high rise buildings with identified unsafe cladding, it is perhaps easy to forget that the move is the latest in trying to resolve what appears to be one of the more egregious consequences of the Government’s failed efforts in dealing with identified risks to buildings following the Grenfell Fire of 2017: creating mortgage prisoners out of leaseholders in potentially unsafe buildings, with no way out.

Clearly, a strategy which consisted of a string of messy announcements together with un-costed and unfunded remedial obligations was never going to deal with the core issue of who was going to pay for removal of cladding and making buildings safe.

This was perhaps aptly illustrated by the amended Building Regulations of 2018 which provided that anyone carrying out building works should use safe materials – but had no retrospective effect. Additionally, the Regulations appeared to have the effect of limiting any remedial action to buildings over 15 metres, a position which seemed to be further supported by restricted access to the Government’s building safety fund.

With this type of backdrop, leaseholders turned to freeholders and/or any management company to cover these remedial costs; and in turn freeholders and management companies pointed to service charge provisions on leases to recover costs from leaseholders. Lenders were reluctant to lend to leaseholders and purchasers without a certificate denoting whether cladding was flammable or not (commonly known as the EWS1 certificate), a process which also costs many £1000’s. The costs associated with establishing cladding safety and carrying out remedial work have of course, been of most concern to leaseholders, who found themselves in the unenviable position of having either having to pay for these costs or being unable to sell or re-mortgage.

Difficulties in establishing liability arising from the time limits on claims, or a contractual obligation between current parties to any dispute (the original builder may no longer be there, and the current lessees would not have necessarily be contracting parties to the original build) led to calls for clarification from all stakeholders.

The Government finally withdrew previous guidance to deal with the blockages caused by lenders’ demands for EWS1 certificates, to allow for a more common-sense approach to prevail (amongst other measures). Following this, and subsequent guidance from RICS, lenders’ concerns as to how accurate risk assessments on buildings with cladding present could be better done seem to have been addressed.

Regardless, campaigners have cautiously welcomed the move, but warned that it will all depend on how all will all work in practice. Questions remain about how tough assessments will be, and whether there will be an impact on the value of the property, and the cost of building insurance. Property owners would still need to show that the costs of removal will be covered by developers, the leaseholder or other scheme. Without a plan for remediation work, or how these will be paid for – it seems that leaseholders may not still have the silver lining they were hoping for.

For more information, please contact Bhavini Kalaria, Partner Dispute Resolution & International at bhavini.kalaria@haroldbenjamin.com