Leasehold Property Rights expert, Mike Hansom, considers the topical issue of inherent defects in leasehold blocks, and whether the landlord or the tenant is liable for rectification costs.
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Typically, long leases provide that the landlord is responsible for keeping parts of the property in repair, with the tenants contributing to the cost of those repairs through the service charge. Questions can arise, however, over responsibility for the cost of repairing inherent defects in the building.
What are inherent defects?
Inherent defects are faults in a property caused by poor design, workmanship or materials at the time of construction. They may not become apparent or easily detectable for many years, long after the defects liability period has ended. In contrast, disrepair arises as a result of the use of the property over time.
The Grenfell Tower tragedy, with the resulting spotlight on unsafe cladding systems used in many high-rise buildings, has served to bring the issue of inherent defects to greater public attention.
Who is responsible for inherent defects?
Originally, the position was that a landlord’s covenant to keep a property in repair did not extend to making good inherent defects, which meant that the cost of rectifying the problem was not recoverable from the tenants through the service charge. Then, in a 1979 judgment, the Court clarified the position, holding that remediation of inherent defects could qualify as a repair, but it was a matter of “fact and degree”. In applying this test, the court would consider a number of factors, including:
- whether the works affect a substantial proportion of the property;
- whether the works would transform the property to the extent that the landlord was getting something that was not there at the commencement of the lease;
- the cost of the works versus the value of the property;
- the effect of the works on the value of the property and its lifespan.
This test has been refined over the years, with the Court later holding that an inherent defect was not a repair unless there was some damage that had been caused which needed repair.
The issue has again been considered very recently in a case before the Court of Appeal. It involved Great Arthur House, a Grade II listed block of former council flats in East London, built in the late 1950s. The 125-year leases were originally granted under the ‘Right to Buy’ scheme. All leases contained a covenant requiring lessees to pay the landlord a reasonable part of the costs of “specified repairs“, which were defined as those required to keep in repair the structure and exterior of the premises, but not amounting to the making good of structural defects. Also included was a clause concerning “any structural defect of whose existence the corporation has notified the tenant” of the estimated cost.
Subsequently, it was discovered that the framework of the building was of poor construction. The landlord completed the required works, which were extensive, and hoped to pass on the cost of £8 million to the tenants, which amounted to £72,000 per flat.
Holding that these costs were not recoverable, the Court of Appeal found that the leases excluded from the service charge repair costs which amounted to the making good of structural defects. It was therefore irrelevant that the works may have qualified as ‘repairs’ under the ‘fact and degree’ test.
Interestingly, in this case, the leases specifically allowed for the recovery of costs relating to rectifying structural defects, but only if tenants were notified of them before entering into the leases, or where the defects were unknown to the landlord for ten years from the start of the leases.
This case serves as a reminder of the importance of considering every case by reference to the specific wording of the lease. Subject to that, a landlord’s entitlement to recover the cost of remedying an inherent defect will depend on the ‘fact and degree’ test.