Cladding update – supporting investors, but also warning them…

2 April 2021 | Investment

Those affected are forced to pay huge sums of money to employ 24-hour fire wardens and inflated price premiums.

Instead, Tice has proposed the implementation of a long-term funding and warranty solution, a guarantee that leaseholders do not have to pay for cladding and fire safety items, and the introduction of a ‘polluter pays’ concept.

The party’s three-step solution involves the creation of a New Homes Warranty Scheme, (NHWS) which would absorb the existing National House Building Council with its £1.9 billion of reserves and receive a cash injection from the government to total £4 billion.

According to the party – the renamed version of the Brexit Party, which saw controversial former leader Nigel Farage quit last month as he stepped back from frontline party politics permanently – the scheme would operate a compulsory warranty scheme for all future new housebuilding with a fee of 1% of the sale price paid by housebuilders.

It would pay all past and future fire watch claims, insurance claims above normal cost, legal costs, installation fees and remedial costs to replace inadequate cladding materials.

In addition, the ‘polluter pays’ principle would see housebuilders still in business pay the costs associated with remedying the inadequate cladding and other fire safety issues. Reform UK says housebuilders should face the penalty of having no more planning consents issued unless this commitment is met.

During his presentation, Tice – the former chair of the Brexit Party who took over from Farage as leader – said the government’s handling of the cladding scandal has been ‘woefully inadequate’ with ‘discriminatory’ and ‘half-hearted’ proposals.

He commented: “The scandal is the product of decades of failure. Firstly, by government, due to the weak building regulations that were badly enforced by inspectors, some of whom were too close to the housebuilders. Secondly by the housebuilding industry, which has a long track record of poor quality of construction and poor customer service.”

“They created a veneer of warranty comfort by establishing an industry warranty insurance provider, the National House Building Council which has failed to step up to the plate in this crisis, instead trying to evade its obligations.”

“The only people not at fault in this scandal are the homeowners, yet they are the ones being forced to pay huge, unaffordable sums. It is grotesquely unfair.”

Tice, who has spent over 30 years involved in residential and commercial property, said he has seen the issues facing millions first-hand. “Reform UK is offering a long-term funding and warranty solution alongside a steadfast guarantee that leaseholders would not pay for cladding and fire safety-related items.”

“The whole point of a warranty insurance scheme is to protect against exactly this sort of issue, yet the industry and the NHBC have failed their customers.”

Reform UK is currently polling at around 2-3% in national polls on voting intention if a general election was held tomorrow.

The cladding crisis will not cut costs of enfranchisement – warning

A director of the Association of Leasehold Enfranchisement Practitioners (ALEP) has warned leaseholders that the cladding crisis is unlikely to reduce the cost of purchasing their freehold.

Up to 11 million people in Britain may live in properties with fire safety issues, facing physical fears for their wellbeing and financial concerns about paying for remediation work.

For many, enfranchisement may seem like an appealing option, offering control of the service charge budget and choice of managing agent.

However, ALEP director Mark Chick has suggested that despite the crisis meaning that many flat owners face uncertainty over the value of their properties, the long-term nature of enfranchisement valuations may actually lead to little reduction in the cost of buying a freehold.

He explains: “Enfranchisement valuations are for the longest term possible. This means that although the flats may have a lower or ‘no value’ because of this issue, the key factors in determining the enfranchisement cost will still be lease length and ground rent income, which are likely to be unchanged.”

Does the need for remedial work affect the cost of enfranchisement?

Despite the government’s announcement of £3.5 billion worth of grants to remove unsafe cladding from high-rise blocks of flats, many leaseholders will still have to pay for the removal of cladding themselves.

Although this may increase service charge costs and prevent them from selling or re-mortgaging their property, it is unlikely to decrease the cost of enfranchisement.

Chick says: “Assuming that the cladding is of a type that needs replacing, there is going to be a short-term depression in value due to the need to find significant sums to contribute to the service charge. However, in the medium to long term, it can probably be assumed that these issues will have been resolved and the building will have returned to ‘normal’.”

“If this view is taken, then the only questions to affect valuation are the risk that the freeholder may have to pay towards the cost of the remedial work, or the current uncertainty as to how this situation will be resolved. Looking to the longer term, the freeholder will argue that this position should not affect the valuation.”

How does a Section 5 notice change the situation?

A Section 5 notice is served on leaseholders by landlords who intend to sell the freehold. Landlords are legally obliged to offer first refusal to purchase the freehold to leaseholders by serving the notice on them before placing the property on the open market.

The serving of the notice may simply be the result of a long-held intention to sell, but Chick says it may also signify a desire from the landlord to walk away from ongoing site liabilities.

He warns: “Any Section 5 offer will have to be looked at carefully to ensure that it represents good value based on all the relevant factors of the case. Those looking to accept such an offer need to clearly understand the extent of the liabilities that their freehold company would inherit.”

For flat owners in this situation who want to proceed, Chick says there is no other choice – as the terms of the offer will be fixed when made – but the options will have to be properly explored before pressing ahead.

“If such a sale does proceed, there is little evidence that the purchase will be at a lesser price than the investor paid,” he adds.

Patience and specialist advice are essential

When assessing the options available to leaseholders looking to purchase a freehold, Chick cautions against proceeding without securing all the relevant information.

He suggests that leaseholders should remain patient and seek professional help with assessing the circumstances surrounding the enfranchisement.

Chick concludes: “The issues around cladding are an evolving situation, particularly given that the options for legislation around leaseholder contributions towards remedial work are still being played out in parliament.”

“There may well be good reasons to proceed with buying the freehold, but all of the surrounding circumstances and liabilities will have to be properly understood in order to be able to proceed safely and sensibly. What certainly is clear is that detailed and specialist advice will be required.”

This post has originally been featured in Property Investor Today.