The Building Safety Act 2022 and residential service charge accounts
The Building Safety Act 2022 received royal assent on 28 April 2022. Here we take a look at how the Act works from an accounting perspective in relation to historical fire safety defects and the future management of building safety measures. Liability to pay is one of the main concerns for landlords, managers and leaseholders.
Historical fire safety defects
The Act creates a “statutory waterfall” in relation to the costs of remediation of historical fire safety defects relating to buildings which are more than 11 metres (five storeys).
The Act aims to see the cost of historical fire safety costs recovered in the following order
- Firstly, from the developer;
- Secondly, from Government funding;
- Thirdly, from the freeholder; and
- Finally, from the leaseholders, but only in limited circumstances.
There will be no service charge payable in the following circumstances
- Where the landlord is responsible for the defect, or it is associated with the party responsible;
- Where the landlord group has a net worth of over £2M multiplied by the number of “relevant buildings” of which it is the landlord. “Group” will include any person or corporate associated with the landlord;
- Where the leases are of low value, that is, worth less than £325,000 in Greater London and less than £175,000 elsewhere; and
- Where the defect involves the removal and replacement of any part of unsafe cladding which forms the outer wall of an external wall system.
If none of the above apply, then the leaseholder’s liability in relation to non cladding related defects will be capped at £15,000 in Greater London and £10,000 elsewhere.
Where the developer or manufacturer still exist, this is the party to look to first.
The limitation period for bringing claims will be
- 15 years for future claims (where the building is not yet completed /constructed); and
- 30 years for historical claims.
When considering the leaseholders’ statutory cap, the costs paid by the leaseholders in the past five years (including waking watch costs) will count towards the cap. It is unclear whether leaseholders will be able to claim a repayment if they have paid more.
Point for consideration
There will be a need for transparency and accountability in dissecting the service charge costs over the five year period since 29 June 2017 and establishing what has fallen due in relation to remediation measures.
Future management of building safety measures in higher risk buildings
In Part 4 of the Act, buildings are categorised as higher risk if they are at least 18 metres or seven storeys high and contain at least two residential units.
Building safety measures will include the following costs which are incurred in connection with the taking of building safety measures
- Legal and other professional fees;
- Fees payable to the regulator; and
- Management costs.
Where the leaseholder is liable to pay a service charge under the lease which includes the taking of building safety measures, this does not extend to paying for works that might be required resulting from the management of the building safety risks.
Where the lease contains different methods for apportioning different relevant costs, the costs in relation to the building safety measures will be apportioned in the same way as costs incurred in connection with insuring the building.
The Building Safety Bill (introduced in July 2021) referred to a building safety charge separate from the building service charge. The building safety charge has fallen away in the Building Safety Act. It will therefore be important that there will be full transparency in relation to the cost of building safety measures which are to be recovered through the service charge.
Point for consideration
The draft residential service charge code 4th edition includes new standard cost classifications to be followed in the preparation of service charge budgets and accounts. It would be helpful if a new cost class called Building safety measures was included together with cost classifications and cost descriptions categories giving further detail of the costs.
How M+A Partners can help
The M+A Partners Property Management Accounting team will be pleased to discuss the accounting issues of The Building Safety Act with you, please get in touch with me at email@example.com