Cladding Rectification Agreements: what you need to know about getting a loan to replace flammable cladding

The new legislation, which came into effect of 30 October 2018, will enable local councils to enter into a cladding rectification agreement with an owner or an owners corporation and a third party lender (unless the local Council is the lender).

The section 185I (5) of the new legislation provides that a cladding rectification agreement must:

a) be in writing; and

b) outline the works to be undertaken on the rateable land; and

c) provide for the lending body to advance specified funds to conduct the works; and

d) provide for the Council to levy a cladding rectification charge on the rateable land; and

e) provide for the Council to use the money received under the cladding rectification charge-

i) to repay the lending body the principal amount advanced plus an agreed interest accrued since that advance; and

ii) for any agreed administrative charge to be retained by the Council.

However, there are conditions that must be met before entering into a cladding rectification agreement. Section 185J (1) provides:

Before entering into a cladding rectification agreement, the owner of the rateable land or, in the case of rateable land managed by an owners corporation, the owner of each lot on the rateable land—

(a) must give the Council details in writing of—

(i) all taxes, rates and charges owing on the rateable land or lot (including the total amount owing in respect of each tax, rate or charge) imposed by or under an Act; and

(ii) all registered and unregistered mortgages over the rateable land or lot;

(iii) if a relevant mortgage is held against 2 or more properties including the rateable land or lot, the proportion of the debt secured by the mortgage that applies to the rateable land or lot calculated in accordance with subsection (3); and

(b) subject to section 185M, may obtain the written agreement of an occupier to pay the cladding rectification charge that will apply in respect of their occupancy.

In addition to the above, section 185J (4) provides that:

Council must not enter into a cladding rectification agreement unless Council is satisfied that the total amount of taxes, rates, charges and mortgages owing on the rateable land when added to the total value of the cladding rectification charge is an amount that does not exceed the capital improved value of the land after the completion of any works that would be undertaken as part of the cladding rectification agreement.

Once a cladding rectification agreement is reached between the parties, the repayments will be shown as a service payment on an owner’s rates notice and it will run with the property until the loan has been repaid in full.

The practical implications of this will be that whomever owns the land, will be responsible for loan repayments even if they did not enter into the cladding rectification agreement.

It is therefore, critical that when acting for a purchaser that close attention be paid to the council information statement to see whether the property is affected by a cladding rectification agreement. Purchaser’s will also need to draw such an agreement to the attention of their lenders as banks are likely to scrutinise these agreements which may result in a lender being unable to lend against the property.

Also, vendors will need to ensure that a cladding rectification agreement is disclosed within their section 32 statement as failure to do so may result in a purchaser’s ability to rescind a contract for lack of disclosure.

Contact Sophie Chessells or a member of our Property Team should you have any queries.

For assistance with entering into these agreements on behalf of owners corporations please contact our Owners Corporation Team.