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Legal sanctions proposed for housebuilders’ failure to fund cladding remediation

  • United Kingdom
  • Construction and engineering
  • Construction and engineering - Articles

17-02-2022

What funding has been made available so far?

A public inquiry into the Grenfell Tower tragedy found that the external walls of the building failed to comply with Building Regulations and that its cladding promoted the spread of the fire.  The inquiry also found that similar materials had been used in over 400 other high rise buildings throughout the country. 

Initially the Government had called on building owners to pay for fire remediation works, such as the removal and replacement of unsafe cladding materials.  Building owners then sought reimbursement from leasehold tenants by uplifting their service charge.  This created what became known as the “cladding crisis” whereby leasehold tenants were living in a potentially unsafe building, unable to sell, and facing extortionate remediation costs whilst being the innocent wronged party.

In response to growing concerns, the government made a number of funding announcements:

  • in May 2018 they promised to pay £400m for the replacement of aluminium composite cladding (ACM) used by councils and housing associations in social housing;
  • the following year in May 2019 they confirmed that the replacement of ACM cladding on private sector residential buildings that were 18 metres high or over at an estimated cost of £200m would also be fully funded; and
  • in March 2020, it provided £1bn in funding through the Building Safety Fund for the remediation of non-ACM cladding on residential buildings 18 metres and over in both private and social housing sectors.

Although these measures provided some assistance, it left those living in high rise residential buildings that are less than 18m high still at risk and financially exposed.  In February 2021, the former Secretary of State for Housing, Robert Jenrick, announced that leaseholders of mid-rise buildings could take out low-interest loans to cover the cost of fire safety repairs. 

New funding proposals

In January 2022 Michael Gove scrapped his predecessor’s loan scheme.  Instead, he proposed the establishment of a new fund of £4bn for the remediation of residential buildings between 11 to 18 metres.  He announced that this would be financed by housebuilders, who he claimed “profited, and continue to profit, from the sale of unsafe buildings.”  Each housebuilder is expected to voluntarily sign up to the fund, although they do not know what contribution they are expected to make until much later.

This new fund is in addition to housebuilders’ existing commitments to remediate those buildings that they have played a role in developing or refurbishing. It is anticipated that many housebuilders have already set aside monies (totalling £1bn) to deal with remediating their own stock. 

A new industry tax upon developers who make a profit of more than £25m per year is also due to commence from April 2022.  This is intended to raise £2bn over 10 years to pay for building safety regulatory reforms.  There is also a further proposal in the Building Safety Bill for developers to pay an additional “Building Safety Levy” when they seek regulatory permission to build.

Threats and enforcement

Although payment into the new £4bn fund is deemed to be voluntary, Michael Gove has said that those who do not contribute will face legal sanctions.  These include:

  • blocking planning permission and building control sign off for schemes;
  • removing developers from the Help to Buy scheme; and
  • banning developers from competing for future contracts with Homes England.

These measures would effectively prevent developers from being able to build and sell new homes. It has been proposed that these enforcement measures could be introduced as new law within the Building Safety Bill, which is currently in draft form and under review by the House of Lords. 

In a press release on 14 February the government intimated that the “courts will also be given new powers to allow developers to be sued where they have used shall companies to manage specific developments, so that can avoid taking responsibility for their actions.”  As yet no detail has been provided on what this will involve or if it will be approved as an amendment to the Bill.

This Bill also proposes to extend statutory rights under the Defective Premises Act, so that those who live in a dwelling unfit for habitation, can make a claim regarding buildings that were built up to 30 years ago (whereas currently this right is only available for 6 years).  Such claims are likely to be met initially by housebuilders/developers and as contractual limitation periods typically last for 6/12 years, it is questionable whether developers will be able to pass on this liability onto their supply chain.

Industry backlash

A number of housebuilders have spoken out that the hard hitting proposals are unfair. 

In particular, the government’s plan to force housebuilders to sign up to a financial agreement, whereby their monetary commitment is unknown at the time of signing has been rejected by housebuilders as being uncommercial and unrealistic. 

The chief executive of Redrow, a listed housebuilder, has claimed that UK housebuilders built less than 50% of buildings with fire safety issues and that the majority were built by foreign investors who are no longer available to pursue.  Furthermore most of these high rise buildings were built by main contractors upon the housebuilder’s behalf.  He also said that 94% of Redrow’s building stock is low rise detached homes and so paying into this new fund is disproportionate. 

The cladding crisis has also caused the government to look closely at what it refers to as “shadowy shell companies”, which it suggests are set up for particular developments by parent companies to ring fence liability and then dissolved.  The government has said it intends to clamp down on these types of companies in future because they are “difficult to trace and identify who they are run by, so they can avoid taking responsibility for their actions”.  However the fact that such companies were allowed to conduct developments in the past has meant that those other developers who are still financially and commercially reputable will be shouldering the additional costs left in their wake.

Persimmon, a housebuilder with the largest proportion of high rise flats after Redrow, has taken legal advice from Lord Pannick QC on the legality of the proposed sanctions for those housebuilders who refuse to contribute to the fund. Lord Pannick QC has advised that such measures would be unlawful because they would penalise developers for declining to do something which they are under no legal obligation to agree to.

The Home Builders Federation has welcomed plans to relieve the financial pressures on leaseholders, but has called upon the government that the repair costs should be borne by the wider construction industry as a whole.  It claimed that other developers, contractors, designers, sub-contractors, insurers and even the government itself should all shoulder the cost.

Further criticisms and problems

There has been criticism from the Labour opposition that the government’s response to the cladding crisis has taken too long.  Many buildings are still at risk and Michael Gove has said that those leaseholders who have already paid out to fix unsafe housing are unlikely to be reimbursed.  There are also no plans in place to help those leasehold owners who are in residential buildings that are under 11m high and different regulatory reform is proposed for England and the rest of the UK.

The new regulatory regime proposed under the Building Safety Bill aims to address the underlying issues at fault so that such problems regarding health and safety do not surface again.  However there have been criticisms that the Bill lacks sufficient detail. Much is dependent on secondary legislation that is still in draft form and in need of further supporting information.  The new regulatory regime has also created an administrative system which is anticipated to cost an initial £810m and an annual recurring cost of £430m.

On 22 January 2022 Michael Gove’s department wrote to the Construction Products Association claiming that manufacturers in the cladding and insulation sectors must also contribute to the cost of unsafe cladding materials. The government noted that such parties made £700m in profits in the four years since the Grenfell Tragedy. However, there is no provision currently in the Building Safety Bill that provides a cause of action against such parties.  It is expected that further amendments will be introduced to the Building Safety Bill to address this, as it is currently in the committee stage with the House of Lords.

According to the National Housing Federation the cost borne by Housing Associations has meant that more than 10% of much needed new affordable homes can no longer be built and there is less money available to improve existing housing stock in social housing.

Commentary

The public inquiry into the Grenfell tragedy and the Hackitt reports showed that there were systemic failures in the construction industry as a whole, with problems originating at every point in the supply chain.  When it comes to issues of liability, it is often difficult to unpick who should bear responsibility, particularly when the wrongdoing is historic and there is presumably a lack of available evidence.

There is clearly a problem that needs to be addressed and everyone is in agreement that the burden should not be shouldered by leasehold owners who are the entirely innocent parties.  The need for a quick solution has meant that housebuilders/developers have been singled out as the party with the biggest pockets to pursue, and well known reputable firms are often the most easy targets.  In some respects it could be argued that the housebuilders’/developers’ overall responsibility for the supply chain has meant that they are the most culpable for the lapse in standards, however those lapses were pervasive across the industry.

Most housebuilders/developers who are still in business have already made provision to finance remedial work to their own developments and it appears that the additional fund is to address the shortcomings from developers who are no longer around to pursue (such as foreign investors, insolvent companies or dissolved shell companies).  The government’s plan to penalise those who do not contribute to these further funding proposals does seem disproportionately unfair.  It appears to target responsible developers who are still in business, whereas the shortfall in funding has come about largely because of failures to regulate the identity of developers who have been able to walk away from their liabilities.