The Government has—understandably—focused on its success in “persuading” 49 of the UK largest developers to fix all life-critical safety defects in buildings above 11m for which they were responsible. However, rather less attention has been given to the 85% of buildings not covered by the pledge. Landlords are responsible for the remediation of these buildings which could be rather costly for pension funds with ground rent investments. In the worst case one or more landlord groups could become insolvent leaving leaseholders in limbo and pension funds nursing significant losses.
Some landlords, such as Aviva, have the resources to meet their remediation obligations. Other landlord groups will find it difficult to fund remediation works or litigation as well as servicing their lenders. M&G and Rothesay Life have significant exposure to a number of thinly capitalised or significantly indebted landlord groups. M&G appears to have up to £2 billion worth of exposure to the three corporate groups (Boardwalk, Jetty and Promenade) that make up the Long Harbour Fund. Jetty was one of M&G’s four largest counterparties in 2019 and 2020. Rothesay has lent £300 million to E&J Estates and, reportedly, around £750 million to companies linked to the Tchenguiz Family Trust.
It is not clear how much landlords will end up having to pay. The Government’s impact assessment found that “For buildings above 11m that have historical non-cladding fire safety defects, there is no reliable data or even estimates of the prevalence, or extent, of these costs…” An ARMA/IRPM survey put non-cladding costs in blocks above 18m at an average of £25,671 per flat and £38,184 in blocks below 18m.
Whatever the final costs are, it is possible that one or more landlord groups could fail. The cash available to these groups is tiny compared to the liabilities they could face. E&J Estates has £31.5 million in cash and the three Long Harbour corporate groups £45.3 million between them. The bulk of their assets are highly illiquid ground rent income streams that are difficult to sell quickly at the best of times and are highly unlikely to achieve their book value in a fire sale even if a buyer could be found.
Neither Rothesay, M&G or the ratings agencies make any reference to financial risks arising from the BSA but it is likely to move up board agendas as the Government moves to clamp down on landlords that are failing to make their buildings safe. In Rothesay’s case it could fall foul of the extensive BSA anti-avoidance provisions and be deemed liable for remediation costs itself—a point raised by the Earl of Lytton in a recent debate on BSA secondary legislation.