Schedule 8: Remediation costs under qualifying leases Paragraph 12: Recovery of service charge amounts from landlords Background
This is a new provision.
	Schedule 8 provides that certain service charges are not payable under leases in respect of relevant measures (to which see paragraph 1 of Schedule 8) relating to relevant defects (to which see section 120). Where service charge amounts are limited by the Schedule, the landlord under the lease will be legally prevented from recovering those costs from leaseholders.
	Paragraph 12 creates a power for the Secretary of State to make regulations setting out who meets the costs that are not recoverable from leaseholders, representing a reallocation of liability that would previously have been attributable to leaseholders. The paragraph makes clear that it is the "relevant landlords" for the building that will need to meet these costs and a definition of "relevant landlord" is provided.
	The explanatory note to section 116 sets describes the ownership structures of multi-occupied residential buildings. In the most straightforward cases, there will be a freeholder who owns the land and the building itself, and leaseholders who own the long leases of dwellings contained within the building.
	The ownership structures of buildings can be, and often are, significantly more complex, with multiple layers of demised lease interests in the building. In some situations, the freeholder will own the land on which the building sits, but the ownership of the building itself will have been demised to another party, such as a head lessee. In more complex scenarios, head lessees can then demise the building or parts of it to other superior landlords. In turn these superior landlords can further demise leases to other superior landlords. Different parts of the building (e.g., different floors of a block of flats) can have different superior landlords. Such ownership structures will vary significantly from building to building. The leaseholder protections provisions in the Act have been designed so that they apply equally to simple and complex ownership structures.
	Such complex arrangements can be thought of as "chains" of demised leases. The leaseholder of the individual unit will have a lease agreement with the superior landlord at the bottom of such a lease chain. As such, the chain of leases has the leaseholder of the residential (or commercial) unit at the bottom of the chain and the freeholder (of the land, or of both the building and the land) at the top.
	Sub-paragraph (2) provides a definition of "relevant landlord" as the landlord under a lease and any superior landlord. This term captures all landlords with a superior lease interest in any part of the building. Resident management and right to manage companies are not caught by the definition because they are not landlords for the building and do not hold leases over it. The "landlord under the lease" will be the landlord with whom the leaseholder has their lease agreement directly. Any landlord above the landlord under the lease in the lease chain will be a "superior landlord".
	The power at paragraph 12 allows all relevant landlords for a relevant building to be allocated liability. As discussed in the explanatory notes to paragraphs 2 and 3, in the first instance, those who are responsible for the defects, and those who can afford to bear the costs in full, are required to do so first. If neither of these conditions are met, some costs can be recovered from some qualifying leaseholders (paragraphs 5 to 7). The remaining costs, that would otherwise have been attributable to qualifying leaseholders, will be spread equitably among all relevant landlords for the building.
	The provisions take a proportionate approach by ensuring that, where there is no clear party to bear the costs in full, an equitable spread of costs is achieved; this includes contributions from leaseholders and from all relevant landlords for the building. This approach has been taken because all relevant landlords will have a stake in the building and thus derive profit from it; as such, it is only fair that all such parties are allocated a share of liability to fix the building in which they have an interest.
	While Schedule 8 removes liability from leaseholders and paragraph 12 creates powers to formally reallocate that liability to relevant landlords, that does not mean that relevant landlords will always need to bear these costs in practice. . The Act contains significant wider powers that will allow building owners and landlords to seek to recover costs from those directly responsible for historical defects. Where cost recovery is not possible, Schedule 8 and the regulations made under the powers in paragraph 12 will provide for an equitable distribution of liability across leaseholders and all relevant landlords for the building.