Leasehold and Freehold Reform Act 2024: an update to the Building Safety Act 2022 Share

Background

The Building Safety Act 2022 (the BSA), which received Royal Assent on 28 April 2022, was enacted as the official legislative response to the Grenfell Tower disaster (see our recent article on the Grenfell Inquiry’s Phase 2 report here). Its primary aim is to enhance the design, construction, and management of higher-risk buildings. The BSA has been implemented in phases and has already undergone numerous changes. The latest changes have been introduced by the Leasehold and Freehold Reform Act 2024 (the LFRA).

Summary

The LFRA received Royal Assent on 24 May 2024 and provides changes to leasehold enfranchisement. Amendments to the BSA have been included in Part 8 of the LFRA and came into force on 24 July 2024 and 31 October 2024. In this article, we summarise the changes and examine their potential impact upon the construction industry.

Changes that came into force as of 24 July 2024

Abolishment and Replacement of Section 125: Impact on Remediation Costs for Insolvent Freeholders

Previously, under section 125 of the BSA, if an insolvent freeholder was required to remedy relevant defects, then upon application of an insolvency practitioner (IP), the Court could order any company or partnership associated with the freeholder of the relevant building to pay remediation costs. This was available when, during the course of the winding up of the freeholder entity, it appeared to be under an obligation to remedy (or to pay the costs of remedying) any relevant defects in the building. This required the associated body corporate or partnership to make payments towards either the insolvent freeholder's assets or towards remedying the relevant defects.

The amendment in the LFRA repeals this clause. The Explanatory Notes to the LFR Bill provided no justification as to the reason for the repeal. However, it would appear that this repeal was done due to its potential conflict with the Insolvency Act 1986 (the IA) and the risk that any sums recovered could instead be paid to creditors given that it is the legal duty of IPs to prioritise paying creditors under the IA.

The New Section 125A: IP Notification Requirements

As of 24 July 2024, in relation to both Relevant Buildings (11m or 5 storeys) and Higher-Risk Buildings (18m or 7 storeys), when a freeholder (or other person or entity managing the property) with repairing obligations becomes insolvent, the IP must inform the Building Safety Regulator (the Regulator), the local fire and rescue service, and local authorities.

The IP must provide specified information (name of the insolvent party, address of the building, details of the IP etc.) to the local authority and the fire and rescue services for the area in which the building is situated within 14 days of their appointment, or if the IP is appointed in relation to an accountable person, they must provide the information to the Regulator.

Where an IP was already appointed prior to 24 July 2024, it is safe to assume the notification requirements would still apply.

Service Charges for Legal Costs Related to Liability for Relevant Defects

Previously, Schedule 8 of the BSA stated that no service charge was payable under a qualifying lease in respect of legal or other professional services relating to the liability (or potential liability) of any person incurred as a result of a relevant defect.

Now, a new exception to existing paragraph 9 with regard to leaseholder protection from legal and professional costs relating to liability for relevant defects has been introduced. This enables residents in a ‘right to manage’/resident management company to recover legal and professional costs incurred after 24 July 2024 in connection with a remediation contribution order (RCO) under the terms of a given lease. This limited exception for recovery of costs (which is not available to freeholders) must be allowed by the service charge provisions in the lease.

Latest changes in force as of 31 October 2024

Section 114, Part 8, LFRA: Amendments to Part 5 of the BSA

Section 114 introduces a new defined term of “relevant steps” to both section 120 and the definition of “relevant measures” in Schedule 8 of BSA to increase freeholders’ and developers’ responsibilities respectively.

The relevant steps focus on mitigation (intended to make it clearer that relevant measures include both interim and temporary measures e.g. waking watches / temporary fire alarms) taken with the purpose of:

• preventing or reducing the likelihood of a fire or collapse of the building (or any part of it) occurring as a result of the relevant defect;
• reducing the severity of any such incident; or
• preventing or reducing harm to people in or about the building that could result from such an incident.

The argument for the inclusion of such temporary measures was made in the First Tier Tribunal (the FTT) case of Triathlon Homes v Stratford Village Partnership. In the first instance, the FTT accepted that the measures were covered1, but other aspects of the decision are now subject to appeal2. The amendment in section 114 removes any ambiguity as to the inclusion of such temporary measures as relevant steps.

It is noteworthy that the amendment may make it easier to extend RCOs to cover other related measures such as improving automatic opening ventilation systems which would “reduce the severity of any such incident" or "prevent or reduce harm to people … that could result from such an incident”, even if this is not in itself needed to rectify a relevant defect.

Section 115: The Power to Order Freeholders to take Relevant Steps

Section 115 of LFRA amends section 123 of the BSA, allowing the FTT to order a freeholder or management company to take relevant steps, including mandating the relevant entity to produce an expert report in relation to relevant defects or potential relevant defects to identify what steps are required. Any such direction is enforceable in the County Court.

Section 116: Additional costs to cover for Freeholders

The LFRA amends section 124(2) of the BSA, confirming that the repairing freeholder is required to cover costs incurred, or to be incurred, in remedying or otherwise in connection with relevant defects. It adds two categories:

• The FTT will be able to include the cost of obtaining an expert report in relation to the building.
• The cost of temporary accommodation where residents have to be moved out for their own safety, or because of the disruption of the ongoing works.

Section 116(7) provides that the amendments are retrospective, applying in relation to proceedings under section 124 that are pending when the amendments came into force (31 October 2024) as well as proceedings commenced after that date. The amendments also apply in relation to costs incurred before 31 October 2024.

Impact moving forward

The amendments are intended to extend the scope of remediation orders and RCOs and to encourage greater take-up by leaseholders. However, given (1) the relative complexity of the remedies and (2) the cost-neutral nature of the FTT (parties must cover their own costs), it remains to be seen whether these latest changes will achieve their objective.

The amended scope of section 124(2) of the BSA will assist leaseholders and others pursuing remediation orders and RCOs in claiming the costs of experts’ reports, or to require a freeholder to commission such a report. This will increase the use of surveyors, structural engineers and fire safety engineers in claims at an early stage. However, given the current shortage of relevant experts, it is likely to be difficult to find an available and suitably qualified expert within a reasonable timeframe.

The BSA’s definition of “relevant steps” still has some ambiguities, reflecting the industry’s general view of the BSA. This is likely to lead to further disputes in the FTT and beyond regarding what actions are included in “preventing or reducing harm to people in or around the building.”

As regards the abolishment of section 125 of the BSA, IPs will have to seek advice should the conditions arise where section 125 of the BSA would have applied. This will need to be done on a case-by-case basis, and instead rely on either RCOs as per section 124 of the BSA and/or building liability orders (section 130 of the BSA).

For further information about this topic please get in touch with the authors Brittany Cox and Daniel Russell of Freeths.