The Building Safety Bill: residential developers beware!
Since the Grenfell Tower tragedy in June 2017, building safety and, in particular, fire safety in buildings, has been at the top of the construction industry agenda. In the four and a half years since the fire, there have been reviews, an ongoing enquiry and much talk of legislative change. More recently, there has been tough talking from the Government about making developers pay to remove and replace potentially unsafe cladding from residential developments.
By way of background, following the review of the Building Regulations and fire safety led by Dame Judith Hackitt in 2018, in July 2020, the Government published the Draft Building Safety Bill (the “Draft Bill”). The purpose of the Draft Bill was to introduce a “new era of accountability” to the building sector in the wake of the Grenfell Tower tragedy.
In October 2021, the Building Safety Bill Committee (the “Committee”) published an amended version of the Building Safety Bill (the “Bill”), and the Government aims to have the bulk of the new provisions in force by September 2023 once the Bill is passed.
As a result of this movement, there are key changes that residential developers should be aware of:
- Residential owners can seek compensation for up to 15 years from residential developers;
- Residential property developers will pay a further 4% tax on their profits; and
- Residential developers will be required to provide financial contributions to cover costs incurred to remediate unsafe cladding.
The Draft Bill
The Draft Bill established a Building Safety Regulator, who will oversee the safety and performance of buildings to assist with the implementation of a more stringent, regulatory regime for higher-risk buildings. These higher-risk buildings have been defined as residential buildings over 18 metres and any care homes or hospitals over 18 metres at the design and construction stage.
The Bill will extend the period in which residential owners can seek compensation for substandard construction from 6 years, as required prior to the Bill’s inaction, to 15 years and the period for which the Building Safety Regulator will be able to issue enforcement notices for non-compliant building work from 1 to 10 years. All developers are required to sign up to and remain members of the New Homes Ombudsman scheme which requires them to provide these residential buyers with any redress or compensation.
Clause 57 of the Bill gives the Secretary of State powers to impose a new Building Safety Levy in England, that will contribute towards the Government’s costs for remediating historical building safety defects.
The Autumn 2021 Budget introduced a Residential Property Developer Tax (the “RPDT”) on corporate companies. The RPDT will be set at a rate of 4% and will be levied on residential property development profits within a company from 1 April 2022 in response to the Grenfell tragedy. The tax aims to raise £2 billion over 10 years to help meet cladding remediation costs. This is in addition to funds that many, including Persimmon Plc, Taylor Wimpey, Bellway and Barratt Developments, have set aside to rectify fire-safety issues in properties that they built of 11 metres or taller.
In addition to the recent developer tax, the Secretary of State for the Department of Levelling Up, Housing and Communities, Michael Gove, announced in the House of Commons on 10 January 2022 a number of proposed changes to various elements of the building safety regime.
The Government has now reset its approach to building safety stating that:
“… the developers and cladding companies who caused the problem are dodging accountability and have made vast profits during the pandemic whilst hard working families have struggled.”
Michael Gove guaranteed leaseholders that live in their own flat that they will no longer have to pay to fix unsafe cladding. In an open letter to the residential property developer industry, the Government announced it has scrapped the proposed loan scheme for leaseholders in medium-rise flats. The changes intend to put the focus of financial responsibility of remediating residential buildings with unsafe cladding on developers.
The industry has been given until March 2022 to convene a meeting to agree to a financial contributions scheme to fund the new plan. The Government has warned that, if the industry fails to do so, the Government will impose a statutory solution to penalise developers forcing them to address building safety issues. Companies are required to agree to a new deal that:
- Provides for financial contributions to cover the cost to remediate unsafe cladding on buildings 11 to 18 metres tall, which the Government estimates to be £4 billion;
- Funds and undertakes all necessary remediation of buildings over 11 metres that they have had involvement in developing; and
- Provides comprehensive information on all buildings over 11 metres constructed in the last 30 years that have historic fire safety defects.
On 19 January 2022, the Bill had its third reading in the House of Commons, in which the Secretary of State’s announcements were welcomed.
In response to the requested contributions above, the chief executive of Persimmon, Dean Finch, wrote to Richard Goodman, the director-general of safer and greener buildings at the Department for Levelling Up, Housing & Communities, saying:
“It would be unlawful for the secretary of state to implement his suggested sanctions of imposing penalties on developers who decline to enter into the proposed agreement, for example, by calling-in planning applications, removal of developers from the Help to Buy scheme and the proposed ban from competing for future contracts with Homes England.”
On 11 February 2022, I received an eight page questionnaire appended to a letter from The Residents Research Team at the Health and Safety Executive. The questionnaire is targeted towards residents living in high-rise flats, focusing on their views towards building safety. Questions range from the property’s fire safety in general to the resident’s relationship with landlords, agents and building management organisations and their overall response to any fire safety concerns. This signifies a move towards a more public approach to building safety, which could result in higher scrutiny of landlords and developers.
On 14 February 2022, Michael Gove unveiled further tough measures and threats that go further than the package outlined on 10 January 2022:
- Developers that still own a building over 11 metres tall, that they built or refurbished, or landlords linked to an original developer, will be required to pay in full to fix historic building safety issues in their property;
- Building owners who are not linked to the developer, but can afford to pay in full, will also be required to put up the money to do so;
- Where building owners do not have the resources to pay, leaseholders will be protected by a cap. This will limit how much leaseholders can be asked to pay for non-cladding costs, including waking watch charges. Any costs paid out by leaseholders over the past 5 years will count towards the cap;
- Developers and product manufacturers that do not help fix unsafe cladding could be blocked from the housing market, as the Government will be able to block planning permission and building control sign-off on developments;
- Courts will also be given new powers to allow developers to be sued where they have used shell companies to manage specific developments, so they can avoid taking responsibility for their actions;
- Further amendments to the Bill will also allow building owners and landlords to take legal action against manufacturers who used defective products on a home that has since been found unfit for habitation. The power will stretch back 30 years and allow recovery where costs have already been paid out; and
- Cost Contribution Orders will be able to be placed on manufacturers who have been successfully prosecuted under construction products regulations, which will require them to pay their fair share on buildings requiring remediation.
Public companies easier to target?
The Government outlined in their letter that they were willing to “to take all steps necessary to make this happen”. These included:
- Restricting access to government funding and future procurements;
- The use of planning powers;
- The pursuit of companies through the courts; and
- The imposition of a solution in law.
UK based public companies are easier to target than private and/or overseas companies, as one weapon in the Government’s arsenal is tax levies, which would not apply outside the UK. Further, the structure of, and scrutiny faced by, a public company may result in greater compliance with the new requirements in comparison to private companies.
The proposed changes appear to mainly affect developers who work in the residential development sector. Yet, the building safety crisis involves a broad group of organisations ranging from regulators, architects, cladding manufacturers, main contractors, subcontractors and developers. It is evident that a formula has not been proposed to distribute accountability for unsafe cladding equally. There is now increasing financial pressure on those in the construction industry to manage adherence to further building safety requirements, the introduction of which looks likely to coincide with rising construction costs and increased taxes.
The new measures indicate that the Government are willing to take all steps necessary to protect leaseholders. The next question arises as to whether Persimmon’s legal challenges will succeed and if the Government is likely to receive a group action from the industry.
By Roma Patel, Trainee Solicitor, Fenwick Elliott