Until remediation works are carried out, there are very few buyers who would be willing to take on such a property, unless at a vastly reduced price. Lenders will not lend on the purchase of a flat which needs cladding and other fire safety remediation works. Therefore, the opportunity to sell is very limited.
The government’s announcement in January that the Building Safety Fund (BSF) is to be extended to cover blocks of flats between 11m and 18m has given many leaseholders more hope of obtaining funding for their remediation works. However, the details will not be published for some months so further delays are occurring whilst leaseholders wait to find out if they will receive funding before starting works.
One possibility which may enable a sale to take place is to agree a retention with the buyer to cover the potential costs of remediation works. This is where the seller and buyer agree in the contract that a certain amount is retained from the purchase price in the seller’s solicitor’s client account following completion. In the event that the buyer is then required to contribute to the cost of fire safety remediation works, they will be reimbursed from the retention.
The retention clause in the contract needs to be very carefully drafted. The buyer will want to ensure that it covers all possible costs associated with the works. It is not just the costs of labour and materials. There can be substantial costs involved in employing surveyors, architects and other professionals to manage the process. If the remediation works require cladding replacement, that will also require planning permission even if being replaced like for like.
There can also be other less obvious costs that need to be covered by the retention such as legal costs. If the leaseholders cannot obtain government funding via the BSF, they may consider taking legal action against the landlord or developer to force them to pay the remediation costs. Legal costs can run into tens or even hundreds of thousands of pounds so, if they are not covered by the retention, the buyer could find themselves paying a share of these costs in an attempt to reduce the amount payable from the retention which benefits the seller.
Another hidden cost that the buyer may incur is vastly increased insurance premiums. Once a building has received an EWS1 survey with a B2 rating, the number of insurers willing to insure it drops drastically and the premiums are usually at least doubled. The buyer should therefore try to ensure that increased insurance costs (after allowing for normal annual increases) are paid out of the retention.
The seller will want to ensure that there is a longstop date for claims on the retention, after which any balance is then paid to the seller. Given the timing involved in carrying out remediation works, the longstop date is likely to be a number of years after completion, rather than months.
The exact terms of the retention in relation to the amount, the duration, the costs to be covered and the circumstances in which it is to be repaid to the seller will all be a matter of negotiation between the parties. In agreeing a retention, the seller has to accept that they may not receive any of the money back and, even if they do, it may not be for years. However, it may facilitate a sale of the property that would otherwise be impossible. There is also some chance of receiving a refund which may be preferable to agreeing a substantial price reduction. The number of potential buyers willing to purchase, even with a retention, will probably still be limited and it will probably exclude those buying with a mortgage. It is, however, something that can be considered where the seller is desperate to move.
