Leaseholder liability
From 28 June 2022, the costs associated with the remediation of unsafe cladding on buildings over 11m or with over five storeys will no longer be recoverable from residential leaseholders. Freeholders will not be able to pass on the cost of historical building repair work or the removal of cladding to their tenants if the freeholder is or is linked to the building developer. Further protection is given to leaseholders for non cladding related issues in the form of a cap on how much they have to pay for these costs. This applies where a developer is not liable and where the building owner is not required to meet the costs in full. The cap applies where property is valued at more than £325,000 in London and £175,000 outside London. Owners of property below this ceiling will pay nothing. Any costs which are not recoverable from leaseholders will be the responsibility of property owners or landlords.
Developer liability
In a further development under the Act, property developers have been caught by new measures which look beyond the asset holding company. By way of background, property developers may use a subsidiary company, a shell company or special purpose vehicle to own and develop a site before selling the completed development to a third party. In some cases, the assets of that subsidiary company are limited to the freehold or leasehold interest in the land being developed. Following completion and sale of the development, the subsidiary might be wound down. These transaction structures can be used to secure finance or investment in a project. One consequence of collapsing the subsidiary is that the developer group is then left with no long-term civil liability for the development.
This has given rise to some concern in the residential sector that homeowners are left without the protection that they would have had under the Defective Premises Act 1972.
Through the Building Safety Act the government has introduced Building Liability Orders to assist those affected by building safety issues.
Building Liability Orders
The Building Safety Act enables the High Court to make an order extending specific liabilities from one company to associated companies and make them jointly and severally liable, where this is just and equitable. These orders are known as Building Liability Orders. Their purpose is to ensure that the original developer group can be required to fund any remediation work where the actual developer entity is unable to meet particular liabilities. Building Liability Orders can be made in the following circumstances:
Liability under the Defective Premises Act 1972 (“DPA”)
A Building Liability Order can be made in respect of liability under the DPA. The DPA gives recourse against those carrying out works for the provision of a dwelling that is not fit for habitation when completed. The scope of the DPA has now been extended to works to existing dwellings. The limitation period during which a claim may be made under the DPA in relation to provision of a dwelling has been increased to 30 years for dwellings that were already complete as at 28 June 2022 and 15 years for dwellings completed after that date. For claims relating to works to dwellings, this will only apply to works completed after 28 June 2022 but will also have a limitation period of 15 years.
Liability for building safety risks
Orders may be made in respect of liability for risks to the safety of people in or about a building arising from spread of fire or structural failure.
Liability for breach of Building Regulations
While the relevant statutory provision has not, as at 13 July 2022, been brought into effect, once in effect Building Liability Orders will also be available where Building Regulations have been breached, under section 38 of the Building Act 1984. Again, the limitation period for making a claim under this section will be 15 years but will be prospective only.
It is important to note that while liability under the Defective Premises Act 1972 will only be relevant to residential premises, liability under Section 38 of the Building Act 1984 and the liability for claims incurred as a result of the risk from fire spread or structural failure will apply to all buildings including commercial buildings.
What is an associated company?
The Building Safety Act includes its own definition of where a company is associated with another. This includes not only the usual group company arrangements but also looks at relevant voting rights and economic control of one entity by another. Other provisions are included to capture Limited Liability Partnerships, nominees and trust structures.
The High Court can make orders for the provision of information and documents, known as Information Orders, relating to persons who are, or have at any time in a specified period been, associated with a body corporate.
What about overseas companies?
The Court may choose to apply a Building Liability Order to a company based overseas if it is an associated company which would be enforced in the normal way.
What next?
A significant number of provisions under the Act are not expected to come into force until late 2023. Watch out for further updates but if you are interested in the Building Safety Act we will be hosting a webinar this Autumn on the practical implications for the real estate industry. Feel free to contact any one of the contacts to register interest.
Authored by Gillian Thomas and Stella Bliss.
