Ashfords Dilapidations – November Updates: Week Four

Dilapidations and cladding: key and topical issues arising

Laws were introduced following the Grenfell disaster to regulate unsafe cladding for high rise residential buildings. Since then both commercial and residential Landlords and Tenants have been grappling with how to deal with unsafe cladding and where the cost for replacement sits between them.

Following changes in the law Landlords were faced with spiralling costs for replacement cladding and would often seek to pass that cost on to long leasehold tenants through service charges leading many tenants to have worthless and unmortgageable properties. The Government has intervened and has encouraged parties to work together to find solutions. Earlier this year the Government announced funding to assist with the replacement of unsafe cladding in high rise buildings of over 18 metres and long-term low interest loans for those long leaseholders in lower rise buildings.

Understandably the focus has been on the residential sector, but what is the situation in a commercial Landlord and Tenant relationship where the parties discover that the cladding is unsafe and needs to be replaced?

The starting point is the Lease, which governs the relationship between the parties. One of the main areas of difficulty is establishing whether the removal and replacement of the cladding is a disrepair and falls within the parties’ respective obligations or not. Often cladding is not a repairing covenant issue but, if it is, the claim can be complex and require detailed analysis given also the interplay with statute. This will include in due course the Building Safety Bill which was laid before Parliament on 5 July 2021 and is likely to gain Royal Assent and become law by July 2022. Expert evidence will often be key in establishing who is responsible for repairing or replacing the cladding.

If the cladding is deemed to be in disrepair the parties need to look at the wording and interpretation of the repairing covenant in the Lease. Often in a commercial lease the tenant will be required to “put” or “keep” the premises in “good and substantial” repair. Sometimes there will be reference to a Schedule of Condition requiring the tenant to only keep the premises in such repair as evidenced in the Schedule of Condition. The premises normally includes the structure of the building. However, in some instances the repair of the structure will remain the landlord’s responsibility with the landlord potentially having the opportunity to recover the cost from the tenant through the service charge.

Normally, in commercial Leases there will be a clause requiring the tenant to comply with statute, and any relevant laws and regulations in relation to the premises. This also poses a problem for the tenant. If following a fire risk assessment the recommendation is to remove and replace the cladding then this could fall within the tenant’s responsibility for replacement of the cladding. In this scenario the extent of “demise” should be identified and understood at the outset – if the cladding forms part of the structure and landlord’s retained parts the tenant may be able to argue responsibility for the cladding rests with the landlord.

The parties should also consider whether the cladding is an inherent defect in the premises that existed prior to the parties entering into the Lease. This could have implications for both parties. If the issue involves poor design or construction, there can be issues of whether the work is too extensive to be a disrepair. In one case it was held that the “complete removal, redesign, and replacement“ of a cladding system on a newly erected office and residential building suffering from water penetration did not amount to a repair. In another case there was issue as to whether wholesale or piecemeal replacement of cladding was suitable. As with arguments over the wholesale or piecemeal replacement of ceiling and carpet tiles, comparable costs and the longevity of the different methods of repairing cladding can be important factors.

Potentially the tenant may have a claim in misrepresentation against the Landlord if it was aware of the problem but did not disclose it. Also the repairing obligations in the Lease may not extend to the defect if it does not amount to a disrepair with no damage, alternatively the Landlord may have a claim against the original contractor who fitted the cladding if it is defective. Again, expert evidence will be key in providing advice on the types of cladding that should or should not have been used at the appropriate time and whether it was a latent defect.

Given complexity of cladding related litigation and detailed evidence required, expensive court proceedings are to be avoided if at all possible. That said where there are complex issues as to liability or otherwise to repair cladding, if the claim is high value potentially an application could be made to the court for a declaration in relation to the parties’ respective liabilities before any works are undertaken and contractors are appointed.