Following years of confusion and changing regulations after the Grenfell tower tragedy, delays in cladding remediation, and a shortage of specialists to clear the backlog, there is a huge number of properties across the UK left effectively unsellable.
“We were delighted to see the government finally taking a firmer stance on the cladding scandal facing thousands of leaseholders in low to mid-rise properties across the country,” Netzer said.
Under the newly proposed legislation, announced last month by Michael Gove, the Secretary of State for Levelling Up, Housing and Communities, the developers of properties affected by unsafe fire measures are expected to pay for the replacement of the cladding, not the leaseholders.
However, Netzer said that while clearly offering a glimmer of hope to leaseholders and well-received by the industry, he fears that the newly announced regulations will fail to provide an effective closure to the cladding issue.
“We would argue that leaseholders remain in a weak position to force freeholders to undertake the work, and, even if they do, they will be asked to bear the cost of the work, perhaps as part of increased service charges,” added Netzer.
Overall, Netzer believes that leaseholders will remain unable to easily sell their flats and, given that most of the buildings affected by the cladding scandal are not newly built flats, this will increase the short-to-medium term need for more newly built flats to plug the gap in housing demand.
Currently, an EWS1 form is required before a property is able to be sold or remortgaged, which has caused massive delays in the housing market.
As a result of this, Netzer said it will put further pressure on the already constrained housing supply.
Netzer added: “Furthermore, the new regulation may lead to years of disputes where developers may well argue that the cladding responsibility does not lie solely with them, but also with those other professionals and manufacturers who specified, certified, and supplied
the materials that were used during construction, which have now turned out to be defective.”
In some cases many of those developers may no longer be in business, especially following large number of insolvencies during the pandemic, and some may be difficult to track down to enforce payment.
The proposed legislation also leaves many open questions, according to Netzer – for example, the fate of leaseholders who have already made payments towards the replacement of unsafe cladding, and the uncertainty around the timing and level of enforcement of the newly announced regulations.
The building and construction industry is highly fragmented and has seen a rising rate of insolvencies over the past five years, accelerated due to COVID and the rising cost of materials.
According to the government Insolvency Service, the number of housebuilders applying for insolvency increased by nearly 80% between 2016 and 2019.
The data also showed that a record number of housebuilders, 368 in total, filed for insolvency in 2019, compared to 312 in 2018, 253 in 2017 and 207 in 2016, which represents a 78% increase over the three-year period.
Most of these firms were small or medium sized developers. The figures indicate the pressure smaller housebuilders were under even prior to the recent coronavirus lockdown.
Netzer said: “Therefore, tracking down the developers of properties affected by unsafe fire measures is no mean feat and may well become an impossible task.
“While we welcome the government’s move, we are also very sceptical that the cladding issue will see a favourable resolution any time soon.”
Looking to the future, Netzer explained that he expects leaseholders will continue to face uncertainty in the months to come as many details are yet to be confirmed.
Netzer concluded: “Many in the industry, including ourselves at Blend Network, believe the government will probably ultimately end up paying for the necessary work to be done.
“Realistically it is highly unlikely that most developers of properties affected by unsafe fire measures will be willing or able to pay billions of pounds to rectify cladding issues.”
