Tenement dwellings - provision of Building Reserve Funds: report

7. How BRF can be applied to Tenements (11)

Look at systems being used in other countries (12) and in other countries, understand levels of cooperation between owners and bodies responsible for building maintenance (13)

A literature review by Douglas Robertson from 2002 explained ‘the notion of the collective which is a core principle in dealing with such matters in other countries is markedly underdeveloped in Scotland.’^[38]

Owners responding to the BRF proposal have also made comparisons to other countries:

‘I find the situation utterly incredible in that a co-owner of a tenement building can refuse to contribute to repairs required for safety reasons and to prevent loss of value to the property. I lived and worked in The Netherlands for many years and have experience of shared ownership of a building. In that country there is a legal obligation to have an owner’s association, the "Vereniging van Eigenaren" (VvE) and which you must join. VvE: This entity is responsible for the common parts of the building like the halls, roof, walls, lift etc. The Owners Association also look after the maintenance, insurance, enforcement of the house rules, etc. ensures the property is well maintained and insured and deals with communal expenses. In meetings with other owners of apartments decisions are taken about the building.’

Another response to TWG’s consultation shared:

‘I also own a co-ownership flat in Toronto. It is in a small block of 23 flats with a common laundry area and storage lockers. There is a very clear model for the management of such blocks and the maintenance of the common areas. This is regulated by Ontario Provincial legislation. It might be worth looking at this for comparative purposes. You should note that this is co-ownership specific form of tenure and is quite different from a condominium. It seems to me that this is very similar to what is needed for tenement stairs in Edinburgh. In my experience of having owned the Toronto flat for 20 years, it works very well.’

In the English language published literature, there has been examination of developments in Australia. This has thrown light on how responsibilities in law do not always match with people’s knowledge and acceptance of collective responsibilities.^[39] In New South Wales the tensions between communal management and property rights have been explored.^[40] There the strata title has been criticised for encouraging multiunit housing, with individual units to be sold off, rather than the whole block since the 1960s. Even though this opened up the ownership of housing to those who could not have afforded before, this also led to unintended consequences around ownership rights and lack of action to repair and maintain communal areas. This literature is useful at mapping how policy decisions in housing can have impacts across decades, and indeed generations.

Guilding et al. (2013) made some useful recommendations for facilitating community title complex decision making and funding works in relation to climate change adaptations in Australia.^[41] These related to promoting advice and guidance for owners, creating champions and require certain processes of management bodies to document needs, costs and timetables for work. Recommendations chime with the advice of stakeholders within our primary research, to provide as much clarity as possible at all stages of new processes.

Examinations of Russia reveal how a large proportion of housing stock transferred to private hands has since been taken back on by local government.^[42] The stock was low quality already, with outstanding repairs required and maintenance costs were not achievable for their owners. Shomina and Heywood (2013) contend that the situation in Russia is intensified by the lack of ‘any tradition either of ownership or collective responsibility.’ In our conversations with stakeholders many reference were made to culture in Scotland understanding ownership, but not understanding collective responsibility. Local Authorities emphasised that stepping in and using powers was a last resort, partly because they recognised a culture of ownership, but mainly because they were conscious of the resource needed to intervene.

Research into major repair work in multi-owned property in Hong Kong points to the difficulties that ‘responsible’ owners experience there.^[43] Firstly, problems common to any collective decision making. Secondly, the nature of major repairs means they are technically complex and ensuring affordability and quality work brings difficulty for owners. This research recommended a combination of support through the public sector, charities and the market working together. This work is relevant as it chimes with the difficulties raised by owners themselves on collective decision making. In terms of finding solutions, our stakeholders acknowledged the need for private-public solutions. Novoville, Traditional Building Health Check and Under One Roof were all raised as good examples to build upon (see Section 8).

One surveyor responding to TWG’s Consultation was keen to avoid issues they observed in other countries:

‘My initial reaction to your proposals is that the changes to legislation will give rise to the creation of companies similar to the French property system in which companies called syndicates control the income and expenditure on communal areas of properties…. My market research into this approach in Paris has identified a great feeling of dissatisfaction from the end users of these services by syndicates. The main reason for the dissatisfaction is due to the lack of planning that is done by the syndicates. The result is owners are often presented with unexpected repair bills of which they feel they have little control.’

One response to TWG included a different approach to altering existing legislation:

‘Perhaps, however, we do not need to look so far afield for a potential solution. There is already in this country a legal framework in which the co-proprietors and tenants are obliged to cooperate, their shared property has legal personality, and is subject to oversight by the authorities and indeed the Land Court. I refer of course to the crofting legislation.

If each flat were to be considered equivalent to a croft, and the fabric of the building, the roof and the surrounding land is considered to be equivalent to the common grazing, we already have a legal framework which has been tried and tested over more than a century. Clearly the rules around usufruct are inherently different for a suburban flat compared to an agricultural holding, but in legal terms they may be said to be quite similar, in that the crofting legislation obliges each crofter to cooperate with their neighbours in the township. It is this cooperation between owners that we are seeking to oblige; and if it could be done in a way that produces more than forced cooperation, so much the better. It occurs to me that the tenement could be considered to be a community body; a community of space; and as such the community body may be able to apply for government funding to improve their community. From time to time the government may introduce favourable terms to these urban crofts to make improvements to the commonly held areas like boundary fences, entrances, or even the streetscape. Funding would be available to these charitable community bodies, in the same way as for any community of place in other areas of the country.

One of the major advantages of using the crofting legislation is that it sits adjacent to but not part of the title deed, and the inherent difficulty with schemes obliging individual owners is inserting the obligation or burden into their title deed. If the burden is not inserted in the title deed it would require to be the subject of a completely new statute. Using the crofting legislation as a vehicle would allow gradual implementation, either building by building or perhaps area by area; other types of statutory implementation require national implementation.’

Looking to Ireland, a requirement for multi-unit developments to establish a Sinking Fund was established through the 2011 MUD Act.^[44] There is a minimum amount required per unit per year, currently 200 Euros. Before any unit in a multi-unit development can be sold by a developer, the act required the setting up of owners’ management companies and the transfer of common areas to the company. The company must set-up an annual service charge scheme to pay for, ‘maintenance, insurance and repair of common areas within its control, and the provision of common services to unit owners’.^[45] Potentially buyers can request the company’s accounts for the three most recent years, and see the balance of separate sinking fund accounts.^[46] Multi units are a relatively new development in Ireland, which explains the tying of requirements to point of sale by developers.

A report by McDonnell (2018) for the Society of Chartered Surveyors Ireland was prompted by their concern that multi-unit developments were not budgeting adequately for future building costs.^[47] The main reason for this provided was that property agents were reluctant to effectively administer, even where repair needs had been established through survey as ‘many property owners do not wish to pay increased service charges today in order to build a Sinking Fund for the future.’ The report also pointed out that owners refusing to pay their Sinking Fund contributions had aggravated the existing issue of missing shares for charges and contributions.

Overall, findings from other countries also point to:

• Historical legislation’s knock-on implications for maintenance and repair.
• The importance of culture of joint responsibility.
• Issues of local governments filling the gap when private owners can’t maintain and repair.
• Complexity of legal arrangements between individuals and collective entities.
• New legislation not providing a quick fix, but potentially mitigating problems of new building in the future.

Assess the impacts of factors on maintenance and repair costs to age of building, number of units, presence of communal facilities and building type (14) and assess the impact of any other factors on maintenance and repair (15) and calculate the relative weight of factors on maintenance and repair costs (16)

In all our conversations with professionals we attempted to unpick the basis for repair and maintenance costs. Some general observations were shared:

Buildings

• Older buildings (1919) tend to require more specialist maintenance and repair, however their build quality has helped mitigate repairs.
• New builds, can require significant repair due to build quality.
• “The sums have to be worked out depending on the type of building and the work carried out on it previously. An amount of money around £200 a year for a pre-1919 tenement just doesn't seem like it would go anywhere near it. There needs to be rules about how it can be spent and when it can be spent.” (Housing Association Representative).

Climate

• Climate change was recognised as an extra factor intensifying repair and maintenance needs, raised that buildings need adaptation now due to its impacts.
• Some tenements, for example situated on the coast or in areas subject to flood are subject to more extreme conditions which may increase deterioration to materials.

Communal facilities

• As a general rule, the more the square footage of communal areas, the greater the cost for maintaining these areas.

Market factors

• Even if data could be analysed to ascertain the general maintenance and repair needs of tenements, the costs still vary based upon the national and local market. Costs will never be ‘like for like’,
• A professional dealing in semi-remote urban areas explained: ‘it’s really difficult, because cost of work varies throughout Scotland. We have islands within our Local Authority and the costs of jobs is higher there because there are ferries to factor in, and there’s less competition of contractors. So I don’t envy anyone who has to come up with what levels to aim for and what contributions people should make. It’s really hard to take a call on that when costs will vary so much across the country. And it has to encourage quality work, not just people opting for the cheapest option.’
• One retired surveyor responding to TWG’s consultation pointed out-

‘When roofing and services need work done, frequently the amount of work cannot be determined until partial opening up or uncovering / exposure of the area in question... If an examination takes place and surveyors or project managers are called in to instruct such (hidden) repairs this could lead to expensive management and supervision costs. Also, if there are limited numbers of contractors and supervisors this could lead to over familiarity and cronyism.’

We found that determining patterns of costs is not helped by data on maintenance and repair, corresponding to all these factors is not readily available to the public or professionals. A professional body explained to us:

‘Although there is a current push for this, Registers of Scotland does not have accessible data to ascertain factors such as age of the building, number of individual units, presence of communal facilities (lifts, large areas of landscaping, roads etc); and building type.’

One Local Authority employee dealing with the private housing sector explained in their interview:

‘I have broad figures for our area. I know how many properties they are, their proportions of tenure. What we don’t know is for all 50,000, how many fall within the definition of ‘tenement’ and within that all the information which would be helpful about the age of the building, feature of the building, set up of the tenement’.

Investigate how BRFs should be managed using a proposed points system (17) and identify what the initial minimum contribution should be and how this should be rated across the points system (18)

There are two aspects to this research question- a proposed points system and financial management. Our research included findings relevant for both aspects from stakeholders.

Suggestions were given regarding a points system (see table 7.1), the only consensus was the general principle that payment levels should be regarded as ‘fair’.

Table 7.1: Points System Options

Points System Suggestions

Flat rate

The consultation pointed out, ‘careful consideration will have to be given to owners' contributions to the sinking fund. If this differs from the title deed apportionment for mutual/common repairs this could complicate management of the Sinking Fund.’ (response from Local Authority)

Further Commentary

Matching the share of contributions to the share of repairs in the deeds is not straightforward either as the deeds might include inconsistencies within the one building.

Points System Suggestions

‘A minimum contribution to a sinking fund should be specified in legislation and updated regularly to reflect the building cost indices.’

Further Commentary

At a UK level-the quarterly construction price and cost indices (PCIs) are produced for use in estimating, cost checking and fee negotiation on public sector construction works.^[48]

Points System Suggestions

Rate based upon repair needs and costs

Further Commentary

Many permutations- see last section

Points System Suggestions

Rate based on the scale of the building and the complexity of the structure, possibly linked to the number of floors (as this affects access & scaffolding etc.) or the square meterage of the flat.

Further Commentary

Many permutations- see last section

Points System Suggestions

Rate based upon circumstances of owner-

‘some sort of support and affordability test is required, I know several of my neighbours cannot afford it, I know some who say they can't but can really.’(Owner, Consultation response)

One Local Authority asked in response to the Working Group’s recommendations: What’s the criteria for being unable to pay into a sinking fund? How do people ‘prove’ they can’t pay? And what level of support is expected to be available for vulnerable owners with high levels of repairs required? Are vulnerable owners who are on low-incomes being penalised for non-payment into sinking funds if additional penalties are to be applied? Or can financially vulnerable owners access a means-tested pot to reclaim investment through government funding?’

Further Commentary

Different observations on affordability and whether it should be:

• Assessed especially to establish if an owner could afford BRF;
• established through whether the owner received benefits currently for example Universal Credit; and
• Scottish Index of Multiple Deprivation used as an indicator of affordability.^[49]

Establishing genuine lack of affordability could be administratively time consuming.

A further complication raised in several interviews was mixed developments with residential and commercial owners. One commercial landlord explained in their TWG consultation response:

‘Where a tenement has (or had as at April 1992) retail premises on the ground floor with flats above, this can result in unfair distribution of both costs and power given that:- • The retail unit can end up bearing as much as 90% of the common costs such as insurance, with flat owners contributing little • If voting rights are allocated on the same basis, then the owner of the retail unit can effectively hold the flat-owners to ransom • If there has been a change of use since 1992 and ground floor units have been converted to residential use, then the ground floor flat owner will owe a vastly different proportion of common costs to the other flat owners.’

In terms of financial management, this was seen as crucial, and issues of trust were highlighted. Many suggestions were made around how the money could be collected, held and managed. For each of these we include the rationale and any related considerations (see table 7.2).

Table 7.2: BRF Management Options

Management Suggestions

'it is accepted that some residents’ associations will already have, or will want to establish and control, their own building maintenance accounts.' (Tenement Working Group)

Further Commentary

Could lead to different models for different tenement blocks.

Management Suggestions

Tying to Council Tax was suggested as a way to bill for common maintenance/ repairs

"It should be based on council tax level. Someone in band A will be in a smaller property than the highest band.’ (owner occupier, Edinburgh)

"Could make it part of the council tax bill and it would make sense to put it there. The council have overall responsibility for housing stock." (owner occupier, Dundee)

Further Commentary

Responsibility for Council Tax can rest with a tenant, not only an owner.

Bands do not account for other aspects of a tenement such as age, location.

Management Suggestions

Deposits Scotland Model

Further Commentary

Three providers in Scotland

60% of deposits are held by SafeDeposits Scotland a not-for-profit organisation.

Connected Tribunal service

Management Suggestions

Managed through part of central government, such as Revenue Scotland

Further Commentary

Collects and manages devolved taxes, including Land and Building Transactions Tax (LBTT)^[50]

Management Suggestions

Consultation response from tenement owners: ‘The use of local credit unions should be encouraged, where possible, particularly if they can assist with loans when sinking funds are at an early stage.’

Further Commentary

The model could be useful for a community-based and non-profit arrangement.

Small loans through a credit union could be preferable to other forms of loans.

Credit unions may pay dividends, rather than a confirmed interest rate.

The current model may not work for the scenario of saving for repairs as many limit savings to up to £15,000.

Management Suggestions

‘consider whether all VAT paid on expenditure by e.g. OAs or via the Social Investment Fund could either be repaid to owners or be mandated to a specific fund to support tenement repairs – e.g. more marginal loans, supporting “mortgage to rent” schemes within RSLs etc.’ (Tenement Working Group)

Further Commentary

VAT as a lever has been suggested by stakeholders. Scottish Government active in requesting changes by UK Government.

Management Suggestions

Un-incorporated Owners Association responding to consultation ‘We would be very much against any part of the sinking fund being used for any costs of arbitration or mediation or a dispute. The result would be that the fund would be eaten up by professional fees. This is totally unacceptable. The fund must only be used for the actual cost of repairs to the building properly authorised by law or under the titles.’

Further Commentary

Organised owners desiring BRF to be at a property level and for no central pooling of money to fund related costs.

Management Suggestions

Consultation response from landlord: ‘There is no mention of association bank accounts, which is surely a more accessible form of saving than a sinking fund? The sinking fund proposals are quite heavyweight and while I don't have an argument with a 'pension scheme' for buildings, they do sound quite aggressive, and costly. If the owners' associations are mandatory, an association bank is surely a good interim measure while legislation works its way through.’

Further Commentary

A professional network of surveyors explained:

‘The establishment of a bank account these days is very difficult and we have been made aware of banks taking months and months to set up accounts or agree to a change of personnel on the account. If the accounts are to be amended every time a property is sold, this will lead to increased administration and likely costs to be increased by the lenders. The AML issues are vast for such accounts given absentee landlords and foreign owners as well as properties owned by companies or other commercial enterprises.’

Management Suggestions

Enforcement of payment of shares into the BRF should be tied into the house sales process. In the same way that a charge against a property is paid off when a property is sold, any underpayment in the BRF share attributable to an individual flat/unit would be paid when a property is sold. (TWG consultation response)

Further Commentary

A professional network of surveyors explained:

‘In practice, a purchaser will want to start with a clean slate – the simplest approach for the purchaser would be for the purchase contract to provide that any SF arrears must be disclosed before settlement and will be deducted from the purchase price. As highlighted in the report, access to the SF details (which must be accurate) before settlement is key. This is going to lead to a lot of additional paperwork on a sale/purchase transaction and that service is not going to be carried out for free leading to additional costs and expense.’

A public body responding to the TWG consultation added:

‘If enforcement is linked to the sale of a unit, then the operation of this proposal in the context of negative equity or a sale under a standard security should be considered further. For example, if an underpayment to the sinking fund would be a debt of the next purchaser, then this may effectively further lock owners into a negative equity position.’

Management Suggestions

Zero percentage loans should be made available where costs and ability to repay are considered. (network of housing associations)

Further Commentary

Loans exist such as Home Entergy Scotland Loan^[51]

Management Suggestions

TWG’s suggestion for investing funds

Further Commentary

Public body responding to TWG recommendations: ‘In the event that sinking funds are to be invested, for example so that growth in value helps fund future repairs or the increase in costs of future repairs, then this would increase the cost of managing the fund. These costs may be disproportionate for sinking funds that have not built up a significant value. Given the nature of investments and the associated risks, there is a risk of the value of investment falling and insufficient funds being available for maintenance.’

Management Suggestions

TWG consultation response from retired Chartered surveyor: ‘Bridging Finance facility will likely need to be provided and funding options considered to ensure that contractors are properly paid. They should not be responsible for collecting debts, their expertise should focus on getting the work done expeditiously and competently.’

Further Commentary

Relates to the issue of tenement owners contracting work, but then experiencing missing shares.

In considering BRF’s implementation attention needs to be placed upon:

• Distrust of fiscal management needs alleviated, or at least recognised and steps taken to provide assurances.
• Points would have an infinite number of permutations.
• Existing issues with determining relative levels of responsibility such as situations with mixed commercial and residential ownership within tenements.
• Concern for cases where owners are affected by genuine lack of affordability.