More Building Safety Act woes for conveyancers

Irwin Mitchell have written an article that looks at the Building Safety Act and suggest there are more woes for conveyancers.

The Levelling Up and Regeneration Bill has now completed its journey through the House of Lords with the amendments being considered in the House of Commons on 17 October. The Bill covers a range of topics including local democracy, planning, regeneration, and the environment. It also contains a clause which amends the definition of a qualifying lease for the purposes of the Building Safety Act 2022 (“the Act”) and in doing so may cause further practical problems for conveyancers who are already struggling with this legislation.

Qualifying leases – The current position

A qualifying lease under the Building Safety Act enjoys certain protections which restrict the costs a landlord can recover through service charges for remedial work to “relevant defects”.

In essence a relevant defect is anything arising from construction or conversion works completed in the last 30 years which results in a risk to life arising from the spread of fire or collapse of the building.

A conveyancer acting for a buyer must assess whether a lease qualifies or not , taking into consideration whether the property is in a relevant building; and, whether, on 14 February 2022, the property was the then-leaseholder’s only or principal home, or whether the leaseholder owned no more than three properties in the UK (including the property in question).

The proposed changes (Clause 250)

Qualifying leases only where there are relevant defects

The first proposal in Clause 250 of the Levelling Up and Regeneration Bill provides that a lease is only qualifying if it is in a relevant building that has one or more relevant defects. When assessing whether a lease qualifies, the leaseholder or their conveyancer would now need to know whether there are any relevant defects. This may only be discoverable when (and if) the landlord serves their Landlord Certificate, and may lead to delays and increased costs.

The intended effect of the amendment is unclear. If a lease is not in a building with relevant defects, does this mean the lease is outside the scope of the Act (as with buildings which are not of the required height to be relevant buildings)? Or does this mean the lease is not qualifying?

Perhaps more concerningly, the wording of the proposal suggests the qualification status of a lease may vary if new defects come to light. As events in recent years indicate, building materials and practices once deemed safe can later transpire to pose significant risks. Leases which were out of scope or non-qualifying may then become qualifying. However, this does not provide the certainty expected by leaseholders and their lenders who require the status of the lease to be determined within the conveyancing transaction. Even if there are no known defects at the time of the transaction, conveyancers are still going to have to gather all the information about the lease. Purchasers need advising on the likelihood of it qualifying should defects come to light later on.

Furthermore, what will happen to leases which have already been confirmed as qualifying leases? Will they now lose their qualification status if there are no known relevant defects in the property?

Allowing the status of the lease to be fluid in this way leaves leaseholders with uncertainty as to the potential costs they could face and leaves landlords less able to financially plan required works.

Changing what it is to “own” three properties

If the property is not the leaseholder’s only or principal home, then the status of the lease turns on how many properties the leaseholder owned on 14 February 2022. The definition of owning property for this purpose was relatively easy: if a person owned either a freehold or long lease in England, Wales or Northern Ireland, they owned a property.

Under this amendment, a person would not own a property unless they owned more than a 50% share of the equity of the property. Accordingly, if a couple owned five properties, two of which were owned as tenants in common in equal shares, those two properties could be disregarded. The proposal increases the number of leases which could potentially qualify, but does so by introducing this conceptually bizarre legal fiction under which any properties owned in equal shared by two or more tenants in common will be deemed to have no owner.

From a conveyancer’s perspective this is a monumental obstacle, requiring investigations into the historical equitable ownership of other properties owned by their client or the former owner of the property which, in respect to the latter, may not be possible.

The “first three” exception

A further amendment proposes that, regardless of the other qualifying criteria, each of the first three dwellings that a leaseholder owns is deemed to be a qualifying lease. This introduces a great number of complexities. How do you determine which are the first three dwellings – is this based on the order in which they were purchased, or can the leaseholder elect? If a leaseholder purchased two properties, then sold one and purchased two more, which would count as the first three? Does this only apply to properties where the leaseholder owns more than 50% of the equitable interest, following the new definition of owning property? And how does this work if the client inherits a property, becomes an executor or even purchases a portfolio?

Even more fundamentally, does this mean that the “first three” leases are qualifying even if none of the usual criteria are met, and there are no relevant defects in the building?

This again brings significant complexity and uncertainty to leasehold purchase transactions, and places on conveyancers the burden of investigating a client’s entire property-ownership history. Ultimately, this will increase costs and delay transactions.

Conclusion

The Building Safety Act has already taken its toll on conveyancers. Many firms are refusing to take on leasehold transactions, and those who remain are struggling with an endless collection of grey areas. In its current form this Bill only adds to the existing examples of hurried and poor drafting. It does nothing to reassure conveyancers or leaseholders that they can meet the requirements of regulators, insurers and lenders. Will this ultimately leave leaseholders unable to move?

Written by Rachel Hardingham (Solicitor) and Hayley Bruce (Practice Development Lawyer)

Kindly shared by Irwin Mitchell