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The Road to Hell is Paved With… ACM Cladding - Reynolds Report

(Or EWS1 Certificates and other hot topics, and why Commercial Property Lawyers need to worry about these too.)

On 14 June 2017 a horrific fire engulfed the Grenfell tower block in North Kensington.  72 people died.  Many more were injured and many, many more left homeless.

Subsequent reports implicated aluminium composite material (ACM) cladding on the exterior of the building in the rapid spread and severity of the fire.  As an almost immediate result mortgage companies became reluctant to lend on flats in blocks having cladding which might be combustible.

The response from the property industry was the creation of the EWS1 (External Wall Systems) Certificate.  This was introduced in December 2019 after discussion between UK Finance (the main lenders’ representative body) and the Royal Institution of Chartered Surveyors (RICS).

A ‘recognised property professional with the requisite qualification’ would carry out an inspection, where deemed appropriate, and would produce an EWS1 Certificate to reassure the lender in relation to fire risk.  The certificate would last five years and would only be required for multi-let residential properties of more than 18 metres (six stories) height.

If the cladding was deemed safe the mortgage company would proceed.  If not it would require the cladding to be replaced.

There were however some fairly severe problems with the solution devised:

  1. There was, at the time, a severe shortage of surveyors (and/or other recognised property professionals) with the ‘requisite qualification’ to carry out the assessments – some put the number in the country at the relevant time as low as 300; and
  2. The few inspectors that existed, had difficulty obtaining cover from their professional indemnity insurers to carry out the assessments due to the potential level of liability in the event of a claim.

In January 2020 the UK Government created further confusion, publishing a consolidated advice note setting out guidance received from the Ministry of Housing, Communities and Local Government Independent Expert Advisory Panel (IEAP), “Advice for Building Owners of Multi-Storey Multi-Occupied Residential Dwellings” (the Advice Note).

The Advice Note stated that the IEAP considered that certain types of ACM (Aluminium Composite Material) cladding caused a significant fire risk on buildings of any height.  In addition many tenants found their Landlords extremely reluctant to arrange assessments, absent (pending the entry into force of the new Fire Safety Bill – expected sometime in the Spring this year) any explicit legal duty on them to do so.

It is estimated that up to 3 million flats may be affected and even those Landlords who do commission assessments are being quoted periods of up to 10 years for an assessment to be available.  This leaves aside the issue of the time for and cost of carrying out any works which the assessment may find to be necessary.

The Royal Institution of Chartered Surveyors (RICS) has attempted to assist the position issuing, in March this year, a guidance note, “Valuation of Properties in Multi-Storey, Multi-Occupancy Residential Buildings With Cladding” (the RICS Guidance).  The RICS Guidance formally comes into effect on 5 April 2021 but RICS Members are encouraged to adopt it immediately.

The RICS Guidance is intended to clarify the circumstances in which a surveyor, when carrying out a valuation of a property (which is a vital stage in obtaining mortgage finance), should require to see an EWS1 Certificate.   In many ways the RICS Guidance is helpful.

The RICS Guidance clearly states that:

  1. Where a building is five or six storeys (excluding basements and mezzanines) an EWS1 is only required where approximately one quarter or more of the whole elevation (estimated from what is visible standing at ground level) is covered by cladding; and
  2. Where a building has been built in accordance with the Building (Amendment) Regulations 2018 no Certificate is required.

Various additional problems are however created:

  1. The RICS Guidance ‘throws into the mix’ other forms of cladding in addition to ACM including: high pressure laminate (HPL), other metal composite material (MCM), rendered external wall insulation systems, plastic, tiling and timber;
  2. It raises concerns in relation to “curtain wall glazing” (that is to say cladding comprising a frame or grid fixed to the face of a structure with glass infill panels);
  3. It raises concerns in relation to ‘vertically stacked balconies’ on properties of five or more storeys; and
  4. It reiterates the requirement for an EWS1 for buildings of four storeys or fewer where there are ACM, MCM or HPL panels.

It is also important to bear in mind that the RICS Guidance does not enable surveyors to issue EWS1.  It, rather, sets out the circumstances in which an EWS1 is required.

Referring, then, to the various ‘case studies’ at the end of the RICS Guidance and the various photographs annexed and noting the appearance of the various structures in relation to which it is stated that and EWS1 will be required (and bearing in mind the frequency with which structures closely similar to these have sprung up in our town and city centres in the past ten to fifteen years) it does not seem that this is a problem which will be going away any time soon.

Why, then, should these issues also be of concern to Commercial Property Lawyers?

In multi-occupancy buildings Landlords will generally try to pass on the cost of any repairs carried out to the structure of the building by way of provision in the Lease allowing them to pass on the cost of such repairs to the tenants by way of Service Charge.

Most modern commercial leases will include in the Service Charge provision the entitlement to pass on the cost of bringing the building into line with current regulatory standards.  In any event however, even where there is no such provision, cases such as Craighead v Homes for Islington [2010] UKUT 47 (LC) establish the principle that where a Landlord is under an obligation to repair and the only lawful way to carry out that repair is in accordance with current Building Regulations then the cost of carrying out the repair in this manner can be included in the Service Charge.  (Even if it could otherwise be argued that the ‘repair’ is, in fact, an improvement.)

Commercial Landlords frequently require RICS valuations of their properties (for example in connection with new borrowing).  It is also important to bear in mind here that where a building does not comply with current fire safety standards it is likely to be difficult if not impossible to obtain fire insurance for that building.

It is highly unlikely therefore that Commercial Landlords will be willing (or able) to simply leave unresolved any issues relating to flammable cladding (particularly in relation to substantial, multi-storey office developments).

Freed from the statutory constraints which restrict the levying of Service Charge in the residential sector and absent the generous financial support which the government is prepared to provide to residential owner/occupiers of residential property to assist to resolve cladding issues, Landlords in the Commercial sector are likely to feel they have free rein to pass on the entire cost of any works required to their tenants over a fairly limited period.

Commercial tenants signing new Leases of properties where issues of this type may arise would be strongly advised to agree a cap on Service Charge, in default of which provision excluding the cost of rectifying existing defects in the premises (such as the presence of flammable cladding) from the calculation of their Service Charge should be sought.

Further Reading:

So, you want to surrender? Not so fast, mon ami… – The Reynolds Report, February 2021

The Help to Buy Scheme is Changing on 1 April 2021

Evictions ban extended until at least 31st May

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Our Property and Commercial Department is headed by Martin Reynolds an experienced commercial solicitor with a background in commercial dispute resolution and insolvency law. To contact Martin and his team; call 0118 958 9711 or email [email protected].

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