The Building Safety Act received Royal Assent on April 28, 2022.
While many of the provisions will be implemented over the next 12-18 months, the industry is being urged to get ready now.
However, preparing for the changes is challenging. Much of the detail of the Act’s provisions will be contained in secondary legislation which is yet to be finalised.
With aspects of the new regime unclear, what steps can BTR developers take now?
Prepare for greater exposure to claims
The Act includes new provisions to extend significantly the limitation period for breach of the duties contained in the Defective Premises Act 1972 (DPA) and these came into effect on June 28, 2022.
S.1 of the DPA applies to the carrying out of work in connection with the provision of a dwelling and imposes a duty:
- to carry out the work in a workmanlike/professional manner
- to use proper materials
- to the effect that when the work is complete, the dwelling must be fit for habitation
The Act also extends the causes of action under the DPA to include work to an existing dwelling, by inserting a new section 2A into the DPA, which has a similar effect to s.1 above.
Claims under s.1 and s.2A of the DPA will be subject to a 15-year limitation period applying prospectively for work completed on or after June 28, 2022. Liability under s.1 of the DPA will also have a 30-year retrospective limitation period in relation to work completed before June 28, 2022.
Liability under s.38 of the Building Act 1984 will also be subject to the 15-year limitation period, applying prospectively, when this provision is in force.
S.38 allows a claim for compensation for physical damage caused by a breach to the building regulations.
It is important to appreciate that the DPA 1972 applies to all dwellings, not just flats in high-rise buildings, whilst the Building Act 1984 applies to all buildings in England and Wales, therefore, the scope of application is wider than just dwellings.
The BTR developer’s exposure to the individual residents will in practice be far more limited than if the development is built for sale
In the context of BTR developments, the exposure to claims under the DPA and the Building Act 1984 could potentially come from purchasers of the building and future tenants and purchasers of the individual units.
The developer’s exposure to the individual residents will in practice be far more limited than if the development is built for sale, since if such residents suffer the consequences of a poor-quality dwelling they will most likely simply move on and, typically, will not have responsibility for the cost of correcting defects.
However, where the development is carried out for a purchaser or there is an operator who has a legal interest in the development then developers should not lose sight of its increased exposure to claims notwithstanding the nature of BTR.
Audit any new-build residential developments that were completed from June 1992 onwards to assess the possible risk of claims under the new 30-year retrospective limitation period.
Review document retention policies to ensure documents are retained in respect of work carried out during the extended limitation periods.
Consider liability of group companies. The Act introduces Building Liability Orders which can be made by the High Court to pierce the corporate veil of group structures in circumstances where it considers it “just and equitable” to do so.
Where a body corporate (such as an SPV development company) incurs liability under the DPA or s.38 of the Building Act 1984 or as a result of building safety risks, the High Court can order that this liability is also the liability of another company within the group (for example a parent company or another company which shares the same parent company).
This would apply where a development company has been dissolved or become dormant so that the courts can make the building liability orders to effectively follow the money.
Consider the impact on the supply chain. Supply chains will also be at an increased risk of claims in respect of work carried out during the extended limitation periods.
This may lead to an increase in prices to manage this risk. Consider whether contractual amendments are required to reflect the extended limitation periods. Consider what insurance is necessary and available to mitigate the risk of this increased liability.
However the hardening of the PI insurance market that has been evident over the last few years is likely to continue with high premiums, wide exclusions and the unavailability of cover commonplace.
If BTR developments are being delivered under development or development and funding agreements, be prepared for greater focus on this area and the prospects of a full “developer release” being qualified going forward.
Increased focus on competence
The provisions of the Act focus on improving competency in the industry and place duties upon those who procure, plan, manage and undertake building work.
Secondary legislation will introduce a new duty-holder regime that the government intends to implement between April 2023 and October 2023.
This will apply to all building work, with additional duties for those working on higher-risk buildings.
The government has previously published draft regulations to detail how the dutyholder regime may operate in practice. However, these have been removed from the website and so a revised set of regulations may be imminent.
In July 2022, the government published a consultation seeking views on the new dutyholder regime and competence requirements under the Building Safety Act 2022.
Maintain a watching brief when the draft Regulations are reissued and monitor closely any changes before these are finalised.
The government has said that these Regulations will be subject to consultation. As originally published, The Building (Appointment of Persons, Industry Competence and Dutyholders) (England) Regulations imposed additional building safety duties on dutyholders under The Construction (Design and Management) Regulations 2015.
The client under the draft Regulations is defined as ‘any person for whom a project was carried out’. This role will often be fulfilled by the BTR developer.
A client must make suitable arrangements for the planning, management and monitoring of a project to ensure the work complies with the Building Regulations. Where there is more than one contractor the draft regulations stated that the client must appoint a principal contractor and a principal designer. Any person carrying out building or design work must have the skills, knowledge, experience and behaviours or organisational capabilities to carry out the work and the duties specified by the draft Regulations.
Review existing internal procedures that assess and monitor competency of the supply chain and ensure that those working on projects can demonstrate the requisite competencies.
Also, start to consult and work with the supply chain to understand what steps they are also taking since they will equally have responsibilities flowing down from the Act and will be considering how to satisfy their obligations and the requirements of their clients.
Appointments and building contracts should make specific reference to the obligation of dutyholders to comply with the competency requirements specified under the secondary legislation when this is finalised.
Consider what records will be required to demonstrate these competencies. The consultation states that: “As a minimum, those carrying out work will be expected to meet the standards set by their sector, for example, relevant training and qualifications recognised by accredited institutions, membership of an established trade or professional body, or relevant experience of the type of work they will undertake.”
The British Standards Institution is developing a suite of competence standards and the consultation states that these were expected to be published in late July 2022. The consultation also states that guidance on the competence requirements will be provided by the Building Safety Regulator.
The client will need to ensure that those they appoint have the systems in place to monitor and evidence that work has been completed in accordance with the building regulations and include contractual provisions to reflect these obligations. Breach of the building regulations is a criminal offence and s.39 and s.40 of the Act make changes to the Building Act 1984 to provide that contraventions may result in imprisonment.
Where an offence is committed by a body corporate with the consent or connivance or neglect on the part of a director, manager, secretary or similar officer then that person and the company may be prosecuted.
These provisions are expected to come into effect within the next 18 months. The Act also amends the Building Act 1984 to extend the period for issuing notices to remove or alter work in contravention of the Building Regulations from 12 months to 10 years.
Big changes for development of higher-risk buildings
Part 3 of the Act provides for a new ‘gateway’ regime to ensure building safety risks are considered at each stage of the design and construction of higher-risk buildings.
Gateway 1 (before planning permission is granted) is already in force.
Gateway 2 and 3 are expected to come into force between April 2023 and October 2023. If a building falls within the definition of a higher-risk building the Building Safety Regulator (BSR), part of the Health and Safety Executive, will become the building control authority.
Assess whether any current or future projects fall within the definition of ‘higher-risk buildings’.
A higher-risk building during the design and construction phase (and therefore subject to the new gateway regime) is a building at least 18 metres in height or has at least seven storeys and either:
- has at least two residential units; or
- is a care home or a hospital.
The government is currently consulting on which buildings are included and excluded in the new regime and on the definitions of these buildings.
Many BTR projects will fall within the definition of higher-risk buildings.
Also consider the timing of future projects. The consultation sets out the government’s proposals for transitional arrangements for the new, more stringent building control process for higher-risk buildings.
The current proposal is that developers will be able to continue work under their existing building control body (and therefore, not be subject to the new regime) if they:
- have submitted a building/ initial notice or deposited plans by the day the new regime commences, and
- commenced work (as defined) on the individual building within six months (the transitional period) of this date.
However, these buildings would still be subject to the requirements under Part 4 of the Building Safety Act 2022 in relation to the in-occupation regime for higher-risk buildings.
The consultation proposes a timescale of 12 weeks for the BSR to decide an application for building control approval.
Building work will not be able to commence until Gateway 2 approval has been obtained from the BSR. Therefore, consideration needs to be given to the procurement process as the design will need to be sufficiently advanced from a Building Regulations perspective for Gateway 2, which may also bring a new perspective for design and build projects.
A building cannot be occupied until the BSR has issued a completion certificate at Gateway 3 and the building is registered.
The BSR has a potential approval period of 12 weeks in which to approve applications for completion which will need to be accommodated in programme.
Again, this needs to be considered in the context of project timelines for completion and occupation of buildings, including in any interfaces with upstream development agreements.
The consultation proposes that the completion certificate application be made when all building work has been completed and considers “that the application should be made either after all notifiable work is completed or when all work including snagging is completed and would welcome views on which approach is most appropriate and why”.
Having to wait to make an application and then awaiting possibly 12 weeks for the BSR to decide could severely impact the date a building can used and occupied
Compliance with the new regulatory regime may cause project delays and contracts need to clearly allocate the potential time and cost consequences of these delays.
In a bulletin from the Health and Safety Executive on May 28, 2022, it was reported that the HSE’s Planning Gateway 1 service has raised concerns on more than half of all planning applications it was required to be consulted on.
When Gateway 2 and 3 are implemented, BTR developers should be prepared for delays both in terms of concerns being raised by the BSR and possibly delays in the BSR dealing with the volume of applications.
Delays may also occur during construction as a result of:
- the powers of the BSR to carry out inspections and open up work for testing;
- changes in design requiring further approval of the BSR;
- the BSR issuing compliance and stop notices; and/or
- Mandatory Occurrence Reporting to the BSR which will involve the obligatory reporting of structural and fire safety occurrences which could cause significant risk to life safety.
Therefore, consider how the risk for these delays will be allocated in both downstream agreements/building contracts and in upstream development agreements and when calculating long-stop dates.
It can be expected that forward funders will expect developers and the building contractor to take this risk, but our experience already shows in negotiating contracts at present that contractors are typically pushing back hard on this.
Consider how the Golden Thread will be kept digitally and start consulting with the supply chain on best practice.
Regulation 21 of the draft Regulations provided that the client must create and maintain an electronic facility for the purpose of holding the Golden Thread information. Whilst the precise requirements are awaited, it is intended that this will include the information and documents required as part of the new regulatory regime and to demonstrate compliance with building regulations.
The Golden Thread will be created before building work starts and is updated throughout the design and construction process.
Therefore, appointments and building contracts will need to address how this information will be stored, accessed, updated and verified as accurate as well as dealing with the ownership of documents.
Participants in a project will also need to consider how information will be shared across different software and platforms. The developer will need to consider how this information will be handed over to the building owner once the development is complete.
S.126 and s.127 of the Act provides for the establishment of building industry schemes to secure the safety of people in or about buildings or improve the standards of buildings including “by securing that persons in the building industry remedy defects in buildings or contribute to costs associated with remedying defects in buildings”.
Whilst we do not have the detail yet, the Act states that membership may be conditional upon remedying, or making financial contributions towards remedying, defects in buildings.
Membership may also be conditional upon whether persons a member contracts with are members of a scheme. Therefore, when these schemes are established, consider contractual provisions requiring contractors and designers to be members of these schemes and to maintain this membership throughout the duration of the project.
There will also be additional dutyholder requirements for those working on higher-risk buildings.
The consultation proposes that that anyone making appointments for building work on a higher-risk building should consider whether a serious infraction (as defined) might call into question a person’s skills, knowledge, experience and behaviours.
Consider what records will need to be kept to detail the steps taken to establish that the person appointed has the competence for the role.
The consultation states that this information will need to be provided as part of the client’s competence declaration “stating that the client has taken all reasonable steps and is satisfied that the Principal Designer (or sole or lead designer) and the Principal Contractor (or sole contractor) meet the competence requirements by having the necessary skills, knowledge, experience and behaviours, including consideration of previous conduct”.
This will put the requirement to provide warranties in respect of new homes on a legal footing
Additional protection for buyers of new homes
S.144 of the Act provides that residential developers must provide a new-build home warranty to purchaser of a new build home and a prescribed person for the common parts with a policy of insurance of at least 15 years.
This will apply prospectively and put the requirement to provide warranties in respect of new homes on a legal footing.
The Act also gives the power for secondary legislation to set out the warranty requirements and financial penalties for failing to comply not exceeding the greater of £10,000 or 10% of the sale value.
Before regulations are implemented, the government plans to “consult widely on the type of defects, costs and liability periods that warranties should cover” but clearly the insurance industry needs to react to provide such products.
Whilst in large part this is aimed at home purchasers as opposed to BTR residents, funders or future purchasers of the development will likely continue to insist on new homes warranties as supplementary protection to warranty packages and in case they later decide to sell rather than rent the development.
Compliance with the Act will come at a cost and the Act introduces additional expenditure for developers and the supply chain generally.
The residential property market will be subject to a new levy which will be implemented under s.58 of the Act through secondary legislation.
The government has confirmed that the Building Safety Levy will be chargeable on all new residential buildings in England. This has widened the scope of the Building Safety Levy and is expected to raise an additional £3bn over 10 years from developers.
Other costs include the BSR’s fees during the gateway process for higher-risk buildings and the fees that may be payable as part of membership of building industry schemes.
These significant changes will add further financial pressure on an industry that is already dealing with challenges including the effects of Covid and Brexit together with material cost increases and labour shortages.
Despite the significant time and cost of complying with the provisions, failure to prepare early may lead to project delays and increased costs.
Therefore, a proactive approach is advisable as new regulations and guidance is published over the next few months.