The Government has recently published details of its plans to "reset" its approach to remediation of buildings between 11m and 18m tall, following the Secretary of State's initial announcement on 10 January 2022 (as reported in our earlier insight).
On 3 February 2022, the Department for Levelling Up, Housing and Communities (DLUHC) wrote a further open letter to residential property developers setting out its proposed "Heads of Terms" for a proposed "legally binding" agreement between the Government and developers. The draft "Heads of Terms" are set out in the letter and, broadly, they comprise of:
- A commitment by each individual developer to remediate those buildings which they themselves played a role in developing or refurbishing. This includes buildings where defects have not yet been identified but are discovered in the future - meaning that the extent of any individual developer's liability may yet be unquantifiable; and
- A commitment to provide financial contributions towards a fund which will cover the costs of remediating cladding defects on all other 11-18m buildings (residential and mixed-use).
In each case, the scheme will cover buildings which have been built or refurbished within the last 30 years. While further work is still needed to develop the mechanics of the scheme, the basic principles set out in the letter include:
- As per the original announcement, the scheme is aimed at legal entities which generate (or expect to generate) profit from the development of residential land in excess of £10 million per year. The £10m figure is however in square brackets, suggesting that Government has not yet reached a settled position on the threshold. The conditions may also include provisions to address the allocation of costs incurred in the context of JV and SPV structures. There will be anti-avoidance provisions, however, and all relevant buildings must have a remediation pathway in place.
- Developers must bear the cost of remediation works: leaseholders cannot be required to contribute. Further, developers who are themselves the freeholder will give a commitment not to initiate forfeiture proceedings against leaseholders with regard to costs associated with carrying out remediation works. Given the stated restriction on recovery of costs from leaseholders, it is assumed that the prevention of forfeiture rights will relate to remediation works that have already been undertaken but have not, yet, been reimbursed by leaseholders. This does also raise the question of whether there might at some point be a retrospective right for leaseholders to recover costs already paid to freeholders, albeit this is not mentioned within the current proposals.
- Contributions to the fund will comprise of:
- An initial amount to cover the first year of operation of the scheme; and
- Annual contributions (supplemented by intra-year contributions if required).
The sizing of each developer's contribution will be based on its historical profits "or other market metric", which is still to be defined.
- There will not be a fixed time period for works to be carry out; rather timelines will be agreed on an individual basis; and
- Scheme participants will have to demonstrate that senior officers and managers are fit and proper persons to lead major development with significant safety and consumer consequences.
Building on the tone of previous announcements, the letter states that "those who agree to fulfil the commitments set out will continue to enjoy the benefits of the Government's services and support on financing, procurement, planning, building control, housing investment, and industry development and leadership. Those who are unwilling to meet these criteria will not". The broad scale of this threat is unprecedented. Its implementation could be challenging for all concerned - presumably Government hopes that the "stick" itself will be enough.
To re-inforce Government's stated aim of ensuring that "the only participants in this market are those who have committed to resolving this crisis", developers who fail to meet their commitments under the scheme will be subject to obligations and restrictions. Again, the exact nature of the proposed "obligations and restrictions" remain unspecified.
While these early indications of how the scheme will work will be welcome clarification to residential developers, there is much that remains to be fleshed out:
- The interplay between this scheme, and the Residential Property Developer Tax (which imposes a 4% levy on profits of residential developers over £25m) is still unclear. The remediation fund which is part of this latest scheme is stated to cover, among other things, the reimbursement of H M Government for the Building Safety Fund and the ACM fund, where works paid for by those funds would have otherwise fallen within the ambit of this scheme.
- We expect further detail to be published in due course about how the scope of remediation works will be determined in the event of any dispute between developers, freeholders and leaseholders, particularly in the context of the recent release of the PAS 9980 standard. During the announcement in the Commons, Michael Gove (Secretary of State for DLUHC) confirmed that this scheme was intended to address all building safety issues, and not just external cladding, which is likely to increase the scope for tension as to the exact specification of remedial works required, as well as practical issues such as access rights to enable the remedial works to actually be undertaken.
- As we reported in our previous insight, the Government is also pursuing contributions from product manufacturers and others. No mention is made in the draft scheme conditions of how any contributions recovered by the Government from other operators in the market will reduce (if at all) the contributions required from developers to the remediation fund.
The Government plans to make a further announcement in mid-February on the commitments both developers and product manufacturers have made to remediate buildings which they have had a role in developing. We will keep you updated as more details emerge.
If you have any queries on this or any construction related issue, contact Sue Ryan.