Passing the costs of cladding removal on to leaseholders is an issue many housing providers are struggling with. Alice Overton of Devonshires looks at some of the less talked about dangers and how to avoid them
Ever since the Grenfell tragedy four years ago, registered providers (RPs) have been grappling with the intractable issue of fire safety. At its heart is the problem of who should pay for the removal of dangerous cladding, and other remedial works, and how much should be charged to leaseholders.
Unfortunately, the potential problems do not end there. If RPs choose to pass costs on to leaseholders and do not adhere to certain consumer credit rules, they may have to foot the entire bill. The good news is that if you are aware of the issue and get the right advice, you can avoid this doomsday scenario.
It may seem counterintuitive, but if you are planning to ask leaseholders to pay towards these costs, then this is a consumer credit issue that requires permission from the Financial Conduct Authority (FCA). This is because you are effectively giving your leaseholders credit by arranging for works to be carried out and then charging the cost back to them. The definition of credit is more far-reaching than many people think: any kind of financial accommodation can constitute a regulated credit activity, not just more-traditional lending activities.
In my experience, there are many RPs that are not aware of consumer credit regulation and how it affects the activities carried out within their organisations, such as giving debt advice.
However, it is crucial that RPs quickly get to grips with the regulations if they are asking leaseholders to foot the bill, or part of it, for fire safety works, to avoid making mistakes and counting the costs. The risk for RPs is that the “credit” offered to leaseholders could constitute a regulated lending activity and, if notified to the FCA, the agreement to repay could be deemed invalid and the RP would not be able to collect the debt.
I have recently advised a group that included some of the largest RPs in the UK in an approach to the Treasury and the FCA to allow RPs to help leaseholders with such costs free from the FCA regime. Unfortunately, this was refused. The reason given was that some RPs have the requisite permission from the FCA to undertake regulated lending activity and that those who don’t would be able to work with other authorised RPs to lend on their behalf. The RPs we have spoken to do not see this as a realistic solution for this scenario and it still leaves most RPs in a tricky situation.
The FCA regulates all consumer credit activity, but some activities are exempt from authorisation. If an activity isn’t exempt, then you need to get permission from the FCA to carry it out. There are a number of exemptions for each type of regulated activity. To register for permission can take the best part of a year and is often a painful administrative procedure.
Charging the cost of fire safety works is likely to fall under the FCA consumer credit regime. One helpful exemption is to ensure that any repayment plan does not stretch beyond 12 months, but this is unlikely to be affordable for most residents, with potential debts of more than £10,000.
Other solutions include entering into a specific type of secured loan. However, this is also complex, as agreements need to be worded precisely to fall into the exempted category. It is advisable to get specialist legal advice if considering this route.
While it is understandable that RPs are focused on how to deal with other aspects of the fire safety crisis, they need to be aware that passing the costs on to leaseholders is a minefield of its own. If RPs fail to do this in the correct way, there could be material financial and reputational implications.
Alice Overton, partner at Devonshires, the law firm