Cladding replacement – who pays?

The widespread replacement of combustible cladding following last year’s Grenfell tower fire comes with a hefty bill. Who will pay it, asks Charis Beverton.

Charis Beverton

High-rise residential buildings and the materials used in them continue to dominate the news.

After last summer’s Grenfell fire, it was established that the cladding used on the tower – aluminium composite material with unmodified polyethylene filler (ACM category 3) – was not and would never have been compliant with existing Building Regulations.

The expert recommendation, supported by the government, is that all ACM category 3 cladding on buildings over 18m must be removed and replaced.

It is likely that ACM category 3 cladding will be banned from use in the near future and the next step is likely to be removal from the market.

On 16 May the government announced it would fully fund the removal and replacement of unsafe cladding by councils and housing associations, estimated at £400m.  The money is reportedly coming from the affordable homes programme.

Taking steps to recover the costs

While the commitment is to fully fund, it is likely the government will be asking owners, landlords or managers to continue to pursue others for costs.  In other words, it is likely they will have to demonstrate that they are taking reasonable steps to recover their costs where possible, before the government allocates the remaining funding.

Most construction contracts require the contractor or consultant to:

• Comply with all relevant statutory requirements including Building Regulations.
• Comply with good industry practice.
• Carry out the work with all due care and skill.
• Ensure new builds comply with NHBC or equivalent NHBC technical requirements.
• Comply with any applicable manufacturer’s guidance on use and installation.

In addition, there is usually a prohibition against the use of “deleterious materials”.

If cladding has been installed in breach of any of the above, there will be a contractual liability for whichever contracting party took the risk of compliance. It will be for the relevant constructing party to show that it was not in breach of contract, or that approval by a building inspector broke the chain of causation reducing or eliminating that construction party’s liability, or both.

But what about approval? If the cladding was inspected and approved but should not have been, the inspector may have breached its duty of care to an employer, developer, contractor or another closely connected third party.

In these circumstances it may be possible to bring a contractual or tortuous claim against the inspector or surveyor alleging that it failed to identify the deleterious material or that it ought to have realised the material was deleterious.

In a recent housing case, a first-tier tribunal (FTT) decided the costs of replacing the cladding were recoverable from the leaseholders under the terms of the lease.

The wording in the lease did have a caveat, namely that the freeholder could recover “reasonable expenses including rectifying or making good any inherent structural defect in the building(s) or any part of the development (except… under any insurance policy… or from a third party who may be liable)”.

The FTT thought the difficulty with the caveat was judging how far a manager should go in pursuing insurance or third-party claims before seeking to recover against tenants. This remains an open question, particularly in light of the government announcements on funding and political considerations around cladding.

Whoever is left with the cost of replacing cladding should therefore be exploring all avenues: government funds, contracting parties, insurance and leaseholders – to fund the significant cost of replacement and protect its position.

Charis Beverton is a senior associate in the construction team at law firm Winckworth Sherwood