The cost of remedying defective cladding – who pays the price?

17 February 2021

After a high-profile and contentious debate in Parliament the government announced a further package of funding to help resolve defective cladding issues on Thursday last week.

Whilst the overarching plan is to remove the burden (or at least some of it) from leaseholders in affected buildings, details are scant. More information is promised in the coming weeks but what do we know at this stage?

The government will provide up to £3.5bn of additional funding to assist with the removal of defective cladding on residential buildings 18m or higher in England. As the funding only covers cladding removal, it appears leaseholders will still have to pay for the costs of rectifying other defects, such as lack of/incorrect fire stopping, insulation issues and balconies which are not fire safe.

There will be government backed loans to help leaseholders with flats in residential buildings between 11 and 18m in England to pay for cladding remediation work. The intention is that leaseholders will not have to pay more than £50 per month for cladding remediation works. Again, there's no mention of other issues such as fire stopping and/or insulation so it looks like these costs will fall to leaseholders.

Unsurprisingly both proposals have been criticised in the press and by leaseholder groups as they leave leaseholders to contribute towards the costs of remedying defects. Freeholders will have to wait for further information to find out what steps they will have to take in order to secure the funding. Experience of existing schemes suggests that it won’t be easy.

How will the government try to recoup these costs?

The government believes the industry should in some way contribute. At this stage, it is focussed on developers and has announced a new levy and a new tax on residential development.

The Gateway 2 levy "will be targeted and apply when developers seek permission to develop certain high-rise buildings in England."

The notes accompanying the draft Building Safety Bill published in July last year mention a new “gateway” system which the development of new high-risk buildings (broadly speaking residential buildings 18m or taller) would have to go through. The gateway system introduces three new gateways (at planning, before works start on site and before occupation). Gateway 2 is described as occurring before works can start on site and as a “hard stop” - i.e. starting works on site without Gateway 2 permission could lead a stop notice from the Building Safety Regulator (breach of which would be a criminal offence).

The government is hoping that a new tax on the UK residential property development sector will raise at least £2bn over a decade and "will ensure that the largest property developers make a fair contribution to the remediation programme, reflecting the benefit they will derive from restoring confidence to the UK housing market." Whilst the Gateway 2 levy appears to be aimed at the construction of new high-risk buildings (regardless of the size of the developer), there is no indication of which developers will be subject to the new tax, how they will be chosen or how the tax will work. A consultation will be forthcoming.

Developers and investors will obviously be keen to understand the level of any additional levies and taxes as these will need to be factored into appraisals.