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Building Safety Fund Hurdle - State Aid

Michael Gove was making all the right noises yesterday (10th Jan) about leaseholders not paying for fire safety defects. But there is already a huge gap in the existing 18m+ Building Safety Fund which will presumably replicate into any new funding proposals. The gap means that even where a building is eligible and gets a grant funding payout, and even if technical eligibility criteria were amended to a perfect scenario where every defect is funded, some leaseholders in that building still need to pay eye-watering sums, which can derail the entire remediation project and impact every leaseholder in the block.


This is due to the State Aid Subsidy rules. In a nutshell, the Government (the "State") can only provide a limited amount of funding ("aid subsidy") to struggling businesses in order to ensure free markets. This is usually agreed with other nations as part of trade agreements. The UK limit is currently set at £350k in any 3 year period. Further background info here.


Any buy-to-let landlord who lets their flat to receive an income, even if currently making a loss, falls under the State Aid Subsidy rules, even if you are not set up as a limited company. For the purpose of the Building Safety Fund, every landlord is classed as an "economic actor" and is subject to the state aid rules. The Building Safety Fund Applicant (eg RMC, RTM, freeholder) has to complete an Economic Actor schedule for the building, where every leaseholder declares if they are an economic actor (ie a buy-to-let landlord), and if so whether they have already received state aid for other reasons. If this sounds boring, it is, but please stick with me...


It is important to note that, strictly speaking, the Building Safety Fund isn't actually awarded to the building or the Applicant as a whole. The funding agreement is written in a way that each leaseholder is awarded a credit on their service charge account, with each leaseholder's credit share based on their percentage contribution to the service charge. It works this way, because BSF can only be awarded to relieve leaseholders of their service charge obligation. One of the first things the BSF team do is a legal review of sample leases, to confirm that the wording means leaseholders would ordinarily be liable to pay for the remediation works via the service charge. In the unlikely event they find a lease where leaseholders are not liable, in a way that is good news, but the building won't be getting any BSF. By moving through the BSF process, the leaseholders of that building are implicitly liable to pay for remediation, and the eventual BSF award as a service charge credit offsets the service charge debt. Thus it is also an accounting necessity to include the cost of works on the service charge as debt, to offset the credit and balance the accounts. Leaseholders never actually see the money as it is paid into a trust fund held by the Applicant, but it will show up on each leaseholder's service charge account.


Why is this important and how can it derail a remediation project? Let me illustrate with an example. I have used nice numbers to make the maths easy, so let's suppose a block of 100 flats had a £5m remediation bill, and each leaseholder's service charge share is equally 1%, so they are liable for £50k each. The 100 leaseholders are illustrated below.

Let's say 20 of them are owner-occupiers (like me) shown in pink. They are not economic actors, and will receive their full share of BSF. Let's say another 74 are small time buy-to-let landlords (shown in green) who own one or two flat as part of their pension investment. It is highly unlikely they will have received state aid or go over the £350k limit, so they will also receive their full BSF share.


Now we come to the big time buy-to-let landlords, who own multiple properties across the UK, and potentially even in the same building (shown in purple). Let's say one of the purple buy-to-let landlords owns 10 properties around the UK, each requiring remediation (£50k owed per flat for simplicity), so their total liability across their portfolio is £500k. At most, even if every building they owned in was fully successful with their BSF application, that leaseholder can still only receive a maximum of £350k from the Government. Let's assume the other buildings they own flats in have got through their BSF quicker, so for the flats they own in this example building above, the purple buy-to-let leaseholders would have their £50k portion deducted by the BSF legal team from the total amount awarded to the Applicant. Those buy-to-let landlords won't receive a credit on their service charge and will still be liable for their own £50k liability while the pinks and greens will have their service charge fully offset. Let's go for an even worse scenario and say that the 5 purple leaseholders above is actually one person owning 5 flats in the same building. Now their shortfall, and the BSF deduction affecting this particular building is even bigger. In really complicated cases, the purple leaseholder may be a commercial unit.


Now there's a problem for everyone, because until the purple buy-to-let landlords pay their share, the whole building is short to pay the contractor. In the above example, 5% short. In a worst-case this could prevent the contract being able to be signed, because the Applicant (RMC, RTM, freeholder) is unable to guarantee they can fund the entire contract. Under the terms of the lease, it has already been demonstrated that leaseholders are liable in order to get any BSF, so the usual debt collection will commence or payment plans required for the purple leaseholders. In the meantime, until the contract is signed, BSF won't release the funding for the 95% of eligible leaseholders, so the Applicant needs to weigh up the commercial risk of signing the contract to release the BSF award whilst giving assurances to the contractor that the shortfall will definitely be raised. If this drags on long enough, the contractor may walk away or up their price, but either way the tender price may become invalid, in which case the whole BSF application is no longer based on anything, and you're almost back to square one.


Now let's take the above example, and assume the five purple leaseholders are struggling to pay, so the building is £250k short to pay the contractor. Could the contractor agree to a reduction in price by £250k to help out? Well they could agree to a reduction, but it wouldn't help out. The new total price would be reduced by £250k, so the works would cost £4.75m instead of £5m. Everyone's service charge share would then be £47.5k rather than £50k. The purple leaseholders would still need to stump up £47.5k, and the pinks and greens collectively would all refund their unspent share back to BSF (i.e refund £2500 each they have now all been overpaid because the works weren't as expensive as originally tendered).


The State Aid Subsidy rules must be scrapped for larger buy-to-let landlord leaseholders caught up in the Building Safety Crisis, for the practical sake of helping every leaseholder in the building. The Government's aim for remediation to "move ahead at pace" is torpedoed by its own rules and every leaseholder suffers from further delay as a result. When Gove says leaseholders shouldn't pay, the Government's own rules translate to "leaseholders shouldn't pay their first £350k". In this scenario it's no good Gove then saying the shortfall should be met by the building owner or developers because the BSF itself has already implicitly confirmed leaseholders are liable by allowing the BSF application to progress and awarding some funding. It's also no good saying those buy-to-let leaseholders can be funded by developers stepping up...the building needs 100% funding to get construction going, and a piecemeal funding approach will not work.


PS, who is the grey leaseholder? They are the mystery leaseholder, who despite the numerous letters, communications and chasers, never bothers to reply, didn't complete a state aid declaration form and is probably oblivious there is even a building safety crisis.


Read below how I can help you

 

If you have discovered fire safety issues with your external walls, Clad To Help provides strategic advice from a leaseholder, RMC Director, Chartered Engineer and Project Management Expert who has led his own apartment block through the highly complex Building Safety Fund process. For support which protects leaseholders and offers cost and time saving strategies, please contact Scott@cladtohelp.co.uk to arrange an initial chat.


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