And who is going to pay? In the world of “leaseholders” and “freeholders.”
By Nick Corbishley, for WOLF STREET:
Imagine owning an apartment in a high-rise building that is suddenly deemed to be a fire trap. Next, you discover that you and all your neighbors will have to pay tens of thousands of pounds each to have the flammable insulation and cladding materials on the outside of the building replaced. You cannot sell the apartment because lenders are refusing to write a mortgage on the apartment. To cap it off, you’re told you have to pay hundreds of pounds a month, in the midst of a global recession — in addition to the mortgage payments and other costs — to cover the costs of round-the-clock fire-patrols to make sure the building you occupy doesn’t suddenly go up in flames.
This nightmare scenario is becoming increasingly common for leaseholders of apartments in the UK. Following the deaths of 72 people in the fire on June 14, 2017, at the 24-story Grenfell Tower in London that had been fitted with highly flammable insulation and cladding, similar materials have been uncovered at thousands of towers across the UK. Owners of flats in smaller buildings have also had their lives upended because their blocks were built with unknown or dangerous materials.
So first… “leasehold” arrangements are still common in England, particularly with regard to apartment buildings with some common land and building use. When an apartment is purchased as a leasehold, the buyer is really no more than a tenant, albeit one with a tenancy agreement that typically lasts for up to a century. The “freehold” — the building and the land — belongs to somebody else, usually the developer or another entity that the developer sold it to, and they are able to extract annual rent on those assets. The terms of the leases have become increasingly onerous as global investors have bought up the “freeholds.” The government has finally been shamed into at least pledging to change this archaic system.
The new building fire safety rules and regulations that came into effect after the Grenfell fire, while largely welcome albeit decades too late, have sparked a host of unintended consequences for the UK’s apartment market.
Mortgage lenders have refused to offer loans for any properties in high-rise buildings that have been flagged as firetraps or have yet to be inspected but could prove to be firetraps. As a result, the vast majority of the UK’s high-rise apartments, which sit at the bottom of the property ladder, are for the present moment impossible to sell or buy.
This could end up causing serious problems higher up the ladder, warns Eric Leenders, managing director of personal finance at UK Finance: “The whole chain of property sales can collapse if one part of that chain can’t get its form: it’s not just the first-time buyers, it’s second-steppers, it’s movers. We just don’t know the scale of the issue now.”
The Financial Times cited an estimate from Campaign group End Our Cladding Scandal that the erosion of trust in building safety had created 1.93 million “mortgage prisoners” in England. Last week, The Daily Telegraph, using data from the New Build Database, suggested that as many as many as 4.5 million buildings could be affected. Since then, the Royal Institution of Chartered Surveyors has put forward proposals aimed at reducing that number.
Most of the buildings have yet to be inspected, leaving millions of leaseholders trapped in financial limbo. Those whose buildings have already been deemed unsafe are having to pay hundreds of pounds per month, in the midst of a global economic crisis, to cover the additional service costs of having 24-hour fire patrols at their buildings. For some, the costs are too much to bear.
For those whose building hasn’t been inspected the wait is interminable. The logistic chaos caused by intermittent lockdowns of the UK economy is hardly helping matters. Nor is the acute paucity of trained inspectors: before Christmas there were fewer than 300 fire safety professionals qualified to sign the forms in the whole country.
Plus, nobody wants to cover the costs for inspections and, if necessary, remediation of the buildings. Total costs are expected to reach upward of £15 billion to rectify the safety issues in all of the affected buildings. But the government has so far only pledged £1.6 billion. Leaseholders argue that freeholders and developers should bear the costs to make buildings safe. But for the moment building owners can pass on the costs, which can reach up to £40,000 per apartment, to residents. And many are.
That could change in the coming months. In November, the house of Lords passed three amendments to the Fire Safety Bill, which included banning leaseholders from being forced to pay. But those amendments will have to pass on the bill’s return to the House of Commons.
The Grenfell fire was entirely avoidable. And positive change may eventually come from it. After two and a half years of hearing evidence, the still-ongoing Grenfell Inquiry has identified three major reasons why the building was fitted with highly flammable materials:
1.Gross negligence by Grenfell’s Building Control Board, the Kensington and Chelsea Tenant Management Organisation (KCTMO). The Grenfell Inquiry has provided unprecedented insight into how the UK construction industry puts profit above safety. Determined to cut corners in its refurbishment of Grenfill Tower, the property’s landlord, KCTMO, switched more expensive zinc cladding panels for the aluminum alternatives, in the process saving itself about £290,000 in costs. This became the main cause of the spread of the fire that claimed 72 lives.
2. Manipulated safety tests and fraudulent product claims by the three manufacturers, Celotex, Kingspan and Arconic. Celotex (from France) and Kingspan (from Ireland) manufactured and sold the insulation that was fitted to Grenfell. Arconic (from the U.S.) manufactured and sold the cladding that was wrapped around it. In all three cases commercial interests appear to have trumped all other considerations, including safety. Two of the firms, together with appliance manufacturer Whirlpool, which produced the fridge that allegedly started the fire, have been sued in the US, but the class action suit was dismissed on grounds that it would make more sense to try the case in the UK.
All three firms (Celotex, Kingspan and Arconic) have been shown by the inquiry to have manipulated the fire safety tests in order to get their highly inflammable products certified for use in high-rise buildings. Internal emails have also revealed that employees at all three firms knew about the huge safety risks posed by their products but sold them anyway.
One example: In 2015, as Arconic’s Reynobond PE cladding was being fitted to Grenfell’s facade, Claude Wherle, a former senior executive at the company wrote in an internal email that the material “is DANGEROUS on facades, and everything should be transferred to FR [fire resistant] as a matter of urgency”. He remarked that this opinion “is technical and anti-commercial, it seems,” adding a smiley face, in an email previously disclosed by the inquiry.
Wherle is one of a number of Arconic workers refusing to appear as a witness to the inquiry. Another, Claude Schmidt, who is a president at a subsidiary of Arconic, had allegedly told the Inquiry team that he will only appear if he can choose the questions he will be asked.
3. Widespread incompetence and seeming conflicts of interest at government and standards bodies, including the British Research Establishment, the British Standards Institute (BSI) and British Board of Agrement (BBA), all of which were privatized in the years preceding the fire. The Labour government also played a big part in paving the way to the Grenfell fire, having lifted a ban on combustible insulation for high rises in 2006. Even after the Lakanal House fire in 2009 revealed the fatal consequences of flammable external panels, it refused to reverse course.
So far, the only people who have paid a high price for the fire — besides the victims, their relatives, and the survivors, some of whom were still waiting for permanent rehousing three years after the fire — are the millions of leaseholders who, through no fault of their own, are now trapped in financial limbo. And many of them are trapped in buildings that are dangerous. By Nick Corbishley, for WOLF STREET.
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