Reserve funds raided to pay for replacement cladding are predicted to cause a surge in dilapidated homes.
While management firms’ emergency funds are drained to pay for the removal of dangerous cladding, desperate leaseholders will be forced to inhabit dilapidated buildings with rising service charges and falling property values. A building safety crisis across the UK has emerged, four years on from the catastrophe of the Grenfell Tower fire.
Experts have warned that the cost of making homes safe will set off a new, years-long disaster of missed repairs: the ‘long Covid of the cladding scandal’
‘Building reserve funds’, pots built up from service charges to cover basic maintenance costs, have been looted by management companies. The money has been used to pay for temporary fire-safety measures, such as ‘waking watches’; personnel employed to walk round a building at night.
Mary-Anne Bowring of Ringley, which manages more than 12,000 properties, said freeholders have abandoned all other repairs to carry out the fire safety works. There are apartment blocks where 100pc of the reserve funds have been spent on replacing cladding.
Nigel Glen of the Association of Residential Managing Agents (ARMA) said leaseholders will be in for a shock when all the work is complete. They will receive a £120,000 bill for lift replacements, for instance, but there will be nothing in the kitty to pay for them. This will be the long Covid of the building safety crisis.
According to ARMA, the average block has only £84,000 left in reserves, which is nothing, Mr Glen says. A new roof could cost several hundred thousand.
Service charges will increase
A flat owner in Northpoint, Bromley, lives in a building that requires remediation but stop-gap costs, such as waking watches, have consumed more than £630,000 so far. The residents’ management company was able to cover the costs only by using the reserve, which was quickly drained. The residents are now in debt and had to borrow £13,000 to cover expenses for electrical work. And the flat owner’s annual service charge has leapt from £2,000 to £6,000.
Northpoint has applied to the Government’s building safety fund and Taylor Wimpey, the previous freeholder, has also contributed. Although a spokesman said its customers’ safety was of ‘paramount importance’, it did not develop the original site and had no ownership or legal responsibility. The freehold had been sold on and the residents’ management company is now responsible for the building’s safety.
Ms Bowring said residents of a building in Kingston, Surrey, had seen their service charge increase by £5,000 a year due to depleted reserves. She believes essential maintenance could be delayed by three to five years, as cash is diverted to cover emergency works. Yet when jobs are delayed, they can end up more complex and expensive, thereby pushing up insurance costs.
Service charges, she added, will rise as quality deteriorates and will affect property prices ultimately. We are heading towards a situation, she maintains, where homes will become dilapidated. Although reserve funds are typically ignored when a property is valued, she said, a depleted fund would inevitably land leaseholders with large unexpected bills in future.
Govt will make owners and industry pay
Matt Hodges-Long of the Building Safety Register, a campaign group, said the use of reserve funds had not only concealed the true impact of the cladding crisis, but had uncovered a lack of transparency around reserve and ‘sinking’ funds, which are similar but are intended for anticipated works. The cost of building maintenance, in particular cladding, which would need to be replaced in a building’s life cycle, is rarely budgeted for.
However, he added, if freeholders calculated accurately what a sinking fund should be, it would result in inflated service charges and render buildings less attractive.
A government spokesman said its priority was making residents safe by using the £5.1bn building safety fund. Buildings should be made safe without the costs being passed on to leaseholders, and ministers will ensure owners and the industry pay for the cladding disaster with a new levy and tax, he added.