Building Safety Bill – Who will pay for the remediation costs?

In our earlier article, Fire Safety Act takes effect with none of the proposed safeguards for leaseholders, we reported that the Fire Safety Act received Royal Assent on 29 April 2021, with no amendments to protect leaseholders from the costs of remediation works – this issue was not addressed within that legislation. At the time, the Minister of Housing, Chris Pincher, commented that the issue of remediation costs was too complex to be dealt with in the Fire Safety Act 2021, but that it was "an important first step" and highlighted that the Building Safety Bill (the Bill) would include measures to provide leaseholders with "stronger avenues for redress"^[1]. This is the third article in our series on the second draft Bill of July 2021 in which we will highlight what you need to know. The question of who pays the costs for remediation works remains the key area of contention following the building safety scandal.

The Minister also said that: "the Government are [sic] committed to protecting leaseholders and tenants from the costs of remediation as far as possible". On 5 July 2021, the amendments to the Bill were published to enable further consultation and scrutiny. Based on the proposed amendments in the 2021 draft of the Bill, "as far as possible" is turning out to be less than anticipated by leaseholders.

There have been significant amendments to the Bill since its first reading in July 2020; many of those amends relate to the funding of building safety works. The relevant provisions are highlighted below. This is the third article in our series on the second draft Bill of July 2021 in which we will highlight what you need to know. In this insight we focus on who will pay the remediation costs.

Building safety charge

The Bill proposes amendments to the Landlord and Tenant Act 1985, as detailed below.

By a term implied into "relevant leases", a leaseholder will have to pay a 'building safety charge'. This will be a separate charge, which will be ring-fenced from the current service charges regime, so will be an additional payment. This applies only to high-risk residential buildings (HRRBs) and must be "reasonably incurred". A duty has also been imposed on landlords so that they have to follow a consultation process if remediation works end up costing a leaseholder more than £250. The creation of a new building safety charge is intended to make it easier for leaseholders to see and know what they are being charged for in terms of safety.

Landlords will be obliged to establish whether the remediation costs can be funded by an alternative source or third party; for instance, insurance, warranties and claims against developers, designers or contractors. This does not, however, have to be established by the landlord before the remediation works take place.

Neither of these sets of provisions can be avoided or restricted by contracting out in the lease.

In addition to the above, landlords will also have to provide details of any remediation steps they are taking and the reasons for their course of action, so that a leaseholder will have an adequate understanding of decisions taken about their building and the reason for any remediation costs being passed to them. Furthermore, landlords must consider any observations made by a leaseholder or a recognised tenants association.

Amendments to the Defective Premises Act 1972

Proposed amendments to the Defective Premises Act 1972 (the DPA) set out in the Bill are particularly significant for consultants, contractors and developers. Under the proposals, there are changes that will significantly affect liability for defects of those involved in the construction and maintenance of residential buildings.

Existing DPA duties

To understand the impact of the proposed amendments, we first need to review the existing DPA duties. As currently in force, s1 of the DPA requires consultants, contractors and developers working on a new "dwelling" to work in a professional or workmanlike manner, to use proper materials and to see that the completed dwelling is fit for habitation. This duty is owed not just to the person for whom the work is done, but also each person holding or acquiring a legal or equitable interest in the dwelling going forward (including subsequent owners), which means that residents/tenants can bring claims even if the freeholder chooses not to.

Proposed DPA amends

The limitation period for bringing a claim for sub-standard construction work is extended from six years to 30 years under section 1 of the DPA. This change would apply retrospectively, so if a dwelling was completed in 2010, proceedings against (say) a developer can, in principle, be brought right up until 2040. The prospective limitation period is expected to remain at 15 years, but there will always be a minimum amount of time to lodge a claim under section 1 of the DPA for those buildings where the limitation periods will be revived for only a short period of time, to one year.

Extension of the scope of application of the DPA from new buildings to including existing buildings, if they comprise of two or more dwellings.

Section 38 of the Building Act 1984

The Bill also has provisions to bring section 38 of the Building Act 1984 (the BA) fully into force and to extend its reach. These are the key points on s38:

• s38 BA has never been brought fully into effect.
• If in force, s38 BA would give private individuals the right to claim damages where breach of a duty imposed by the Building Regulations has caused "damage" (disease/personal injury/death) from the person/entity that committed the breach.
• s126 of the Bill extends the limitation period for claims under s38 BA to 15 years by the insertion of a new clause 4B into the Limitation Act 1980.

Unlike the change to claims under the DPA, this only applies prospectively.

The Bill itself does not provide for section 38 to be brought into force, but in the Government's transition plan of July 2021, the Government stated that the intention is that s38 BA will commence at the same time as the changes to the DPA i.e. two months after the Bill receives Royal Assent.

A key point of interest is that under the current proposals, as far as we can see, s38 is not limited to dwellings or residential properties - whether this is intended or an oversight will no doubt become clear as the Bill progresses through Parliament.

Developer levy

A further amendment to the Building Act 1984 at s57 enables the Secretary of State to provide for a new building safety levy at gateway two (also known as the gateway two levy) - the deposit of plans stage for building control approval in respect of HRRBs. If the levy is not paid, the application will not be signed off by the Regulator and construction works cannot commence.

This levy is being imposed as another avenue by which the Government can recover some of the cladding remediation costs from the construction industry. It will operate alongside the proposed Residential Property Developer Tax (RPDT) that was announced in February 2021.

What's not included in the Bill?

Some of the omissions from the 2021 draft of the Bill are of interest.

In the 2020 draft of the Bill, provisions were made to allow building owners to charge leaseholders for historical building safety costs, even for defects that pre-dated residents moving in, but these provisions have been removed. The Bill does allow building owners to use the building safety charge to cover ongoing costs.

In February 2021, the Government announced plans for long-term loans for leaseholders of buildings between 11m and 18m high who face cladding replacement bills, with loan repayments capped at £50 per month. The Government stated: "[u]nder the scheme, no leaseholder will ever pay more than £50 a month towards the removal of unsafe cladding". The intention was that provision for these loans would be set out in the Bill in fact, that provision is not included at present.

While the Government has provided various funds to compensate tenants in HRRBs in relation to building safety works, not all associated costs are recoverable.

Is there scope for substantive changes to the Bill of July 2021?

The Bill has now been completed at Committee stage in the House of Commons and no more written evidence is being received. The Bill is now at report stage and a third reading took place on Wednesday, 19 January 2022, it will now move to the House of Lords for consideration. The proposed amendments from across the Commons so far include the following:

• where there are proposals for the extension of the limitation period to 15 years under the DPA and under s38 of the Building Act, to make that 30 years;
• to set up a Building Safety Indemnity Scheme, akin to the Motor Insurers' Bureau for RTAs, to act as a failsafe to protect tenants from the costs of remediation works to be funded by levies on developers, building insurers and mortgage lenders;
• to allow for recovery of VAT on building safety remediation works since June 2013 and to make further costs of such work zero-rated for VAT purposes;
• for stringent terms to be implied into all construction contracts for works on residential buildings e.g. fitness for purpose and without any building safety risk; and
• where urgent building safety work is needed, the leaseholder/tenant has notified the freeholder and there is no response after 90 days, then there should be (effectively) a presumption of consent by the freeholder.

As above, some of the proposed amends to the Bill are major but this is usual with such an important piece of legislation. Although the outcome can never be guaranteed one way or the other, it is unlikely that we will see radical changes to the Bill as introduced to Parliament on 5 July 2021. It is safe to say that the limitation periods mentioned will not be extended beyond the proposed 15 years (as this could compromise both the funding and insurance behind construction works) and that some leaseholders and freeholders will undoubtedly remain or end up out of pocket, having had to contribute to the costs of remediation works.

Interestingly, however, we now have a new Minister with responsibility for the Bill, Michael Gove, who has renamed the Ministry of Housing, Communities and Local Government to be known henceforth as the Department for Levelling Up, Housing and Communities^[2]. Michael Gove is clearly out to make his mark and recently commented publicly on the Bill and there are currently some substantive revisions being made to the draft of July 2021.

In our insight "Unsafe Cladding – Government Invitation to Developers to Voluntarily Provide Additional £4bn Of Funding", we reported on Michael Gove's announcement in Parliament on 10 January 2022. Mr Gove has written to developers requesting the following:

1. a consensual contribution to meet costs for unsafe cladding on properties between 11m and 18m in height;
2. for those developers who played a role in the construction of buildings between 11m and 18m, over the last 30 years, to undertake all necessary remediation works; and to
3. provide comprehensive information relating to fire safety defects in buildings above 11m.

Mr Gove made it clear in his speech that the burden must not be left on leaseholders for any remediation costs relating to the ongoing cladding crises, including costs associated with other related fire safety measures. The controversial loans and debt will also be scrapped for leaseholders – no buildings over 11m will have to pay and statutory protection will be provided to leaseholders in due course. Mr Gove's intention is to make those who benefitted from the construction of these buildings i.e. developers and construction product manufacturers, responsible for those costs associated with remediation.

The impression provided is that if those responsible do not step up to the plate, drastic measures will be taken, in the form of legislation, to make them comply. In any event, Mr Gove made it very clear, that leaseholders will not be held responsible for these costs and the current drafting of the Building Safety Bill will be amended to provide "statutory protection" in this regard.

In addition, the "Consolidated Advice Note" was immediately withdrawn and replaced with "common sense" risk assessment measures, which have already been published by the British Standards Institute, namely, PAS 9980. The assessment emphasises practical measures such as sprinklers and fire alarms, instead of costly remediation. It is the intention that PAS 9980 will help fire risk assessors take a more proportionate approach to fire risk assessment and the assessment of walls, and avoid a wholescale approach to cladding replacement. It is hoped that PAS 9980 will replace EWS1 assessments.

Mr Gove is also taking other practical steps to reassure the public that he is taking control of the situation in that:

• The Royal Institute of Chartered Surveyors is to be equipped properly to deal with the cladding issue;
• An additional £27 million will be provided for fire alarms;
• Waking watches will be stopped;
• The limitation period for claims relating to building safety will be increased to 30 years from construction;
• the next phase of the Building Safety Fund will be brought forward to earlier this year;
• discussions will take place with lenders and insurers to address the current growing crises faced by leaseholders, in that they are unable to obtain mortgages and insurance on leasehold properties; and
• building surveyors will benefit from a government backed indemnity scheme to ensure that a balanced approach to assessing risks is adopted.

One important issue that Mr Gove's speech did not address is what will happen to freeholders that are affected by the cladding crises. It remains to be seen if this issue will be raised by the various constituents prior to the further update, which is expected by Easter. Mr Gove has reassured the public that he is dealing with the cladding issue and that a solution will be imposed on developers in law.

The Bill is now unlikely to come into effect before 2023.

We will keep you updated.

If you have any queries on this or any construction related issue, please contact construction and engineering partner Sue Ryan.

Footnotes

[1] Hansard - UK Parliament - Fire Safety Bill Volume 811
[2] Ambitious plans to drive levelling up agenda