Building Safety Bill: the future of funding building safety measures

Who should be liable for the costs of remediating or implementing building safety measures in residential buildings has been the focus of increased media and government attention over recent years. With the introduction of the Building Safety Bill into Parliament, developers, building owners and occupiers of higher-risk buildings need to ensure they follow the progress of the Bill through Parliament closely, to avoid costly surprises.

The government published the second draft of its Building Safety Bill on 5 July 2021, with a number of significant amendments. Developers, owners, managers and occupiers of higher-risk buildings, which are currently defined as buildings with at least two residential units and at least 18 metres in height or seven storeys, need to understand the implications of the proposals on constructing, maintaining and occupying residential properties.

Although the Bill sets out a number of proposals to ensure buildings meet future building regulations, including the introduction of a Building Safety Regulator and New Homes Ombudsman, the Bill also proposes radical changes to how safety works are to be funded. The government has, however, stopped short of including proposals to prevent the cost of remediating historical building safety defects being passed onto leaseholders.

Implied terms in leases

The Bill proposes implying certain terms into all relevant leases, which will impose obligations on building owners, managers and leaseholders to ensure appropriate standards are met with regards to building safety. The proposals are currently targeted at leases of over seven years and which provide for a service charge to be paid by the leaseholder.

The designated Accountable Person(s) will have to ensure compliance with their "building safety duties" imposed by the legislation and cooperate with any person in connection with their own duties.

The Bill envisages multiple layers of responsibility, to avoid accountability falling through ownership or management gaps in existing leases.

As a quid pro quo for the additional obligations, the Bill also sets out a mechanism for gaining access to individual apartments, in order to carry out building safety works. As it stands, gaining access where a leaseholder refuses can be a lengthy and costly process.

Building safety charge

As well as obligations, the Bill sets to imply a new charge into leases to cover the cost of building safety works, to be ring-fenced from other charges under a lease. This ring-fencing is to stop payments from being subsumed by general service charge payments or debt or applied towards matters other than building safety.

Building safety costs are the costs (or estimated costs) incurred or to be incurred by or on behalf of an accountable person for a higher-risk building in connection with taking building safety measures.

"Costs” are set to include:

(a) legal fees (if not otherwise recoverable);
(b) other professional fees;
(c) fees payable to the regulator; and
(d) management costs.

Requirements, in respect of the forms of demands and restrictions on recovery similar to those already in place for service charges, will apply to building safety charges, and landlords and managers will need to ensure their processes and precedents are closely monitored to avoid technical breaches.

Parties will not be able to contract out of having these terms implied.

Cost protection for leaseholders

In addition to the statutory protections proposed for the Building Safety Charge, amendments to the statutory consultation process have been proposed to oblige landlords to explore other avenues of funding, before looking to recharge to leaseholders. When embarking on defined building safety remedial works, a landlord must take reasonable steps:

• to ascertain whether any grant is payable in respect of the works;
• to ascertain whether all or any of the cost of the works may be met by a third party; and
• to ascertain whether any other prescribed kind of funding is available.

If any of the above funding options are available, the landlord is under an obligation to obtain the funding. However, the landlord is not required to comply with their duty to seek cost recovery avenues before carrying out remediation works. The details of what will amount to "reasonable steps" will likely be determined on a case by case basis.

The proposals do not change the existing liability of leaseholders to pay for building safety works.

Extending limitation period for claims against developers

Linked with the proposals requiring landlords to explore third party funding options is the proposal to extend the limitation period for claims against developers up to 15 years. This will be achieved by amending the Defective Premises Act 1972 and the Limitation Act 1980, and by reference to section 38 of the Building Act, which is not currently in force. These provisions will apply retrospectively and seek to follow the mantra of "polluter pays". However, many practical issues will need to be overcome if leaseholders are to see any real benefit from this proposal and ultimately, some remedial works will be required as a result of changes to regulations (as opposed to "shoddy" work by developers).

Osborne Clarke comment

Although the proposed legislation is still in draft form and is currently principally targeted at high-rise residential buildings, the changes that are ultimately brought in will fundamentally change the landscape for construction and investment across the residential sector.

The government, arguably, sidestepped the issue of preventing the passing of costs of remediating historical building safety defects onto leaseholders during the passage of the Fire Safety Act, on the basis this was more suited to the building safety legislation. Now that the Bill has been introduced to Parliament without express comfort on this issue, we can expect to see a rather turbulent passage through Parliament.

The Bill is complex and it will be a long process before the proposals are formerly implemented into the real estate sector. Whether it will provide the protections leaseholders require from a safety and funding perspective, while balancing the need for new homes to be built, remains to be seen.