The Building Safety Act - an upset to the concept of “developer release”?

• United Kingdom

• Construction and engineering

30-01-2023

The Building Safety Act 2022 (“BSA”) has introduced broader liabilities upon developers with the aim of ensuring building safety. Some of these apply to all buildings. However, what does this mean for developers, including SPVs, who thought that their liabilities were released once they sold on their development? How does this affect historic claims and, most importantly, what steps can developers take to mitigate against the risk of future claims?

The concept of “developer release”

On a development project, it is common for the developer to have a “release” from its contractual liabilities once the development has been sold on. This is on the understanding that the purchaser will have ongoing responsibility for the building and the developer has no ongoing interest. This is usually subject to the purchaser first obtaining a set of collateral warranties or third party rights from the contractor and consultants, under which it can make a claim if there are any latent defects.

This position is common in developments, so that the developer can take on new risks and liabilities in the construction of their next project. Very often the developer uses a SPV (a specified purpose vehicle). This is a separate corporate entity set up for a specific purpose, in this case the development of a building. A SPV is a separate entity and its liabilities are ringfenced from other members in the corporate group. This allows risk to be more effectively managed and provides funders with greater control over the SPV’s assets for the purpose of financing the project.

Usually the assets of such SPVs are limited to those relating to the development for which they are established. This means that they may have insufficient funds to satisfy rectification costs. However, this is not a problem if the purchaser has first been given its collateral warranties or third party rights, so that it is able to pursue the contractor and consultants directly. Very often the SPV is dissolved once it has obtained its “developer release” from liability.

The issue with building safety

Despite the fact that the developer has a release from liability in respect of its contractual obligations, it may still find itself liable under the BSA, even after selling on the property:

• the Defective Premises Act (the “DPA”) provides for a 15 year limitation period if the right of action accrues after 28 June 2022 (or 30 years applied retrospectively if the right of action accrued before 28 June 2022) for a dwelling that is unfit for habitation
• s.38 Building Act 1984 (the “BA”) provides for a 15 year limitation period for claims for breach of the building regulations which causes damage in relation to any building (not yet in force) 
• the BSA creates a new liability for anything that causes a building safety risk, which is defined as a risk to safety in or about a building arising from the spread of fire or structural failure.

From a building safety perspective, it is important that these claims are actionable against the liable party, so that effective measures can be taken. Sometimes in construction cases there can be problems of enforcement. If the liable party is insolvent or has dissolved it may not be possible to pursue them to pay or carry out the remediation works. The BSA is proactive in addressing this issue by introducing the concept of Building Liability Orders.

Building Liability Order

A Building Liability Order provides that the liability of one body corporate can be transferred to or shared jointly and severally with another specified body corporate. This means that the liabilities of the original party continue and can be satisfied using the assets of another body corporate provided that it is an “associate” of the original party. An “associate” is defined as a body corporate which controls the other or if a third body corporate which controls them both. A Building Liability Order continues to have effect even if the liable body corporate has dissolved before or after the issue of the order.

A Building Liability Order can be issued by the High Court whenever it considers it just and equitable to do so. Building Liability Orders came into effect from 28 June 2022 and can apply to any liability that is yet to be incurred or has already incurred, provided that the liability is still within its limitation period.

These provisions in the BSA are to alleviate the legacy of unsafe buildings and to ensure that any such defects are remedied now and in the future. However it does overturn the premise upon which most developments are based upon , which is that the developer walks away and has no ongoing liability. It also means that even SPVs that have been wound up may still incur liability, which can be transferred to another group entity.

Flow down of liabilities

There are some potential ways that a developer can flow down its liabilities under the BSA to a contractor and/or consultant(s):

1. Contractual claim

If the developer retained its contracts and appointments with the contractor and consultants when it sold the development, it may be able to make a contractual claim against these parties. It is therefore very important for a developer not to assign its rights under the building contract and appointments to the purchaser at the time of sale. Despite having a contractual release of liability under a development agreement, it may still wish to exercise its right to make a claim against a contractor/consultant for building safety liabilities. The building contract and consultant appointments should also either grant third party rights or be assignable to group companies, in case these parties are pursued under a Building Liability Order or Remediation Contribution Order.

However the effectiveness in having such contracts may be limited, as such contractual liability is likely to be for 12 years (which is the limitation period available under a deed). As historic claims under the DPA (pre-28 June 2022) can have a limitation period of up to 30 years and future claims under the DPA (since 28 June 2022) and BA have a limitation period of 15 years, it is possible that contractual liability may have expired for later claims, preventing the contractual flow down of liability.

• for future claims - There has been no market shift in extending contractual liabilities in construction contracts to 15 years to be commensurate with the duration of liability under the BSA. This may be because BSA claims are regarded as no different to other liabilities that are also of a longer duration and for which there is no contractual flow down past the 12 year limitation period (for example there is already a long stop date of 15 years for latent defects in tort)
• for historic claims – If a developer is faced with a historic claim, going back up to 30 years it is likely that the limitation periods in the construction contracts will have already expired for the purpose of a flow down claim

Without this contractual flowdown there may be an opportunity to pursue the claim under the Civil Liability (Contribution) Act 1978 (as explained below).

2. Civil Liability (Contribution) Act 1978 claim

There may be potential to seek contributions from third parties under the Civil Liability (Contribution) Act 1978 (“CCLA”), which allows a defendant to seek a contribution from another party in proportion to the extent of its responsibility. This is only available if the other party could be liable to the claimant for the same damage. It also means that if many parties are responsible for the loss, a party seeking recompense will have to launch proceedings against multiple parties to retrieve the maximum possible contribution. If one of these parties is insolvent it may not be possible to recover the proportion of their contribution.

There is no clear authority on whether such contribution claims can be effective after the original contractual liability has expired. It is hoped that, considering the purpose of the CCLA, this would be the most equitable solution. It could be considered possible by the case Energy Works (Hull) Ltd v MW High Tech Projects UK Ltd and others¹ , which established that a contribution claim is not dependant on the existence of a contractual remedy. In that case a contractor pursued a contribution from a sub-contractor after assigning the sub-contract to an employer. However until this issue is specifically determined by the courts, it is not clear for a developer if it will be able to recover a contribution from other parties, nor the full extent of its possible exposure.

3. Claim under the DPA

A developer may be able to make a claim against a contractor/consultant under the DPA for work at a dwelling that is considered unfit for habitation. The developer can only exercise this right if it retains a legal or equitable interest in the building. If a developer sells on its interest to the purchaser, as is usually the case, it will no longer have a legal interest in the building.

All of these potential remedies for a developer are dependent upon it being successful in making a claim, and thereby proving a breach. as well as the usual measures of causation and mitigation.

Is this fair on developers?

It seems that a developer can be in a tough position as it will no longer be able to obtain a complete release of liability. If it is liable via the BSA, it will have limited recourse, as its opportunity to flow down claims is restricted.

The best way that a developer can mitigate its position is by ensuring that it maximises its potential to flow down claims whenever possible. Most importantly this can be done by:

• not assigning the building contract and appointments upon sale of the development, so that it is able to pursue its contractual claims up to 12 years and
• seeking contributions from the contractor/consultant as other liable parties under the CLCA where possible

Given that building safety is a priority, particularly with reference to residential buildings, it is perhaps not surprising that the BSA provides such a tough approach towards developers. It appears that despite contractors/consultants providing their design input, the developer is deemed to have overriding responsibility for these matters in the progress of a likely claim. The best way to offset liability is to manage and mitigate such building safety risks from arising in the first place, which surely must be the main concern.

However, where it can be regarded as unfair on developers is that the DPA permits claims that could potentially be a lot wider than matters relating to building safety. The test under the DPA is whether a dwelling is unfit for habitation and case law has shown that this can be interpreted broadly. The DPA has never previously been a popular means of redress, perhaps because prior to the BSA it had a 6 year limitation period. It remains to be seen whether we will see a more active use of the DPA, with the revised limitation periods under the BSA. If so, this may become a key battleground for developers in 2023.

Written by Gemma Irving.

[1]           [2020] EWHC 2537 (TCC)