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Building Safety Bill – Court will have power to extend liabilities beyond SPVs

  • United Kingdom
  • Construction and engineering
  • Real estate
  • Real estate dispute resolution

11-04-2022

Introduction

At the time of writing the Building Safety Bill1 has had its  third (and final) reading in the House of Lords – the last chance for input by that chamber.  Following considerable changes in the Lords, not only does the Bill potentially extend time periods for claims beyond what anyone might have previously envisaged, it now also fixes potential liability on entities who might have thought they had been discharged from liability, or indeed never thought they would be liable in the first place.

Developers and landlords will have to take a look at their existing (and previous) projects to work out where liabilities might now spread. Going forward changes to ownership structures and construction contract third party rights may need to be considered.

It would be fair to say that the Bill has attracted significant national press coverage and commentary – not just in the many specialist trade journals.  When the Bill becomes law the post-Grenfell world will not be the same, as the Bill is a substantial overhaul of the entire process for building safety.  It creates a new regulator, and additional stages and duties for design and construction, together with ongoing management duties.  Michael Gove, the sponsor of the Bill, has certainly had much airtime.  He started the New Year with a comment that the building safety system was “broken” and stirred up the development sector more recently with a comment that there is a cartel of volume housebuilders in operation.  Gove’s statement at the start of the year made it clear that the property industry is to pay for cladding remediation.

The current draft of the Bill is both large and complex.  It creates new, free-standing legislation and amends several other Acts  by inserting additional provisions.  The Bill’s evolution is a bit like legislative whac-a-mole.  Perceived gaps have been the subject of additional changes. One of the more controversial changes in the Lords has been the introduction of a power for the courts to pierce the corporate veil (i.e. to go after corporate entities who would otherwise be able to shield behind their separate legal existence).

The corporate veil principle

Companies have a separate legal status.  They are independent legal entities, separated from shareholders/owners.  They can hold assets (property or equipment etc) and sign contracts in their own name, in the same way that individuals can. Corporate law scholars head back to a House of Lords decision in 1897 regarding the effects of the Companies Act of 1862 (Salomon v Salomon & Co. Ltd)2. There a business was incorporated with a number of family members as shareholders, as well as the main operatives. The business went bust.  It was argued that the family member shareholders were lackies – a device to ensure that there was simply the requisite number of shareholders to satisfy the 1862 Act.  The House of Lords disagreed: the requirements of the 1862 Act had been complied with and the company was duly constituted.  The Lords would not allow the liabilities of the corporate entity to be passed onto its shareholders.

Of course, great legal theory cannot hold true in all circumstances.  In matters of criminality (particularly fraud and dishonesty), taxation, injunctions, and certain “sham” transactions the courts will pursue others who exist behind the corporate entity.  For example, in the civil context this might include a seller who transferred land to a wholly owned company to avoid an order for specific performance from an aggrieved purchaser.

Why is this relevant?

The extent of the Bill is explained below but those involved in property development commonly use special purpose vehicles (“SPVs”) to develop.  Whilst the use of SPVs is not universal (a developer might use a regional entity instead), having a SPV permits the ringfencing of the liabilities of a particular property development to one corporate entity.  The structure employed by the developer may use a “DevCo/PropCo” route, so that development responsibilities and liabilities are held separately from land holdings, albeit within the same corporate group.  SPVs are also useful for creating joint ventures between different parties.

SPVs can be helpful when raising finance for a particular project.  Again, liabilities can be clearly demarcated and a “clean” entity created to accept finance without any historic baggage. With a SPV liabilities from other projects cannot appear suddenly, threatening unexpected insolvency. Parental guarantees may be required but might be limited.  With certain funding structures (e.g. non-recourse project finance) there may only be value and income from the assets the project creates with no parental guarantees.

On completion of the construction and sale of development assets, the SPV will normally be wound up.  Corporate accounting is settled and the developer moves on. However, the Bill proposes that the developer may still be liable for the activities of the SPV, with the introduction of Building Liability Orders.

Building Liability Orders

The current Bill allows the High Court to make a building liability order if “just and equitable” to do so.  The effect of an order is to enable the Court to make the liability of a corporate body (the original body) the liability of another specified category of corporate body. A health warning when reading the Bill is that it has one of the single most uses (overuses?) of the word “specified”.  In summary, any associated body can be caught according to the Court’s discretion (see below).The fact that the original body has been dissolved is irrelevant.

What liabilities are caught?

The court can only transfer liability from one corporate body to another.  The Bill does not create a new category of liability for the specified body.  So, the original body must have had a liability that relates to a building in England:

  • under the Defective Premises Act 1972 (which is amended by the Bill to extend liability) or
  • under section 38 of the Building Act 1984 (which will be brought into force by the Bill) or
  • as a result of a building safety risk.

Defective Premises Act 1972 (DPA 1972)

In summary the provisions of the DPA 1972 already allow redress for occupiers of newly constructed dwelling houses where they are not fit for habitation (including the use of improper materials). Those involved in taking on work for or in connection with the provision of a dwelling can be liable.  This could include developers, professional team members and contractors. However, the Bill proposes to extend the liability of the DPA 1972 to cover work on existing dwellings (e.g. refurbishment or similar).  In addition, liability periods will be considerably extended.  After the Bill becomes law claims for new or refurbished properties can be made for 15 years.  If the claim relates to the construction of a new dwelling (not refurbishment) prior to the Bill becoming law the liability period is now 30 years from completion of the defective work.

Section 38 Building Act 1984 (BA 1984)

Section 38 of the BA 1984 creates civil liability for breaches of any building regulation duties that causes damage.  It was passed as part of the BA 1984 but was never brought into force.  It is proposed that this section will become law and the Bill specifies that the liability period for this claim will be 15 years.  The Government’s advice note on redress points out that the BA 1984 does not cover economic loss but the DPA 1972 does.

Building Safety Risk

A “building safety risk” is a term introduced by the Bill and is a general “catch all provision.  It is defined as “a risk to the safety of people in or about the building from the spread of fire or structural failure” in relation to a building.  A different part of the Bill (Part 4) has a slightly differing, and potentially wider, definition – it remains to be seen if the draftsperson will tidy that up.  It is interesting that it does not affix liability to any particular duty created by the Bill.  Part 4 of the Bill does provide for possible criminal liability for an “Accountable Person” relating to building safety risks but, the original developer or builder is not at all likely to be the Accountable Person.  Nevertheless, there is always the possibility of contractual or tortious (e.g. negligence) liability in the absence of statutory liability.

Which bodies can be Associated Bodies?

The Bill provides an explanation on who is an “Associated Body”.  It is a control based test that includes a look towards parent companies.  It is interesting to note that the Bill does not borrow the detailed definitions that already exist in the Companies Act 2006 for defining parent and subsidiary undertakings plus control of undertakings. Neither does it make use of the standard definitions of ‘control’ that would typically be used in a contractual context, as set out in the Corporation Tax Act 2010.  

The section says that an Associated Body will be any corporate entity which owns at least half of any of the share capital or voting rights;  is entitled to the half of the distribution of income; or entitlement to half of the assets on winding up.  Special reference is made to limited liability partnerships.

In addition, there is a general sweeper test on control, direct or indirect, when the affairs of the original body are conducted in accordance with the directions of another body.  This may catch “shadow” shareholder positions.

Nominee arrangements are also made transparent, so an associated entity cannot hide behind a nominee or multiple layers of controlled subsidiaries.

When considering this,  it is interesting to note that in a multi-party joint venture (each party having a third of the voting rights), the joint venture partners would not be deemed to have control under the definitions proposed.  Similarly, the section fixes on bodies corporate (including limited liability partnerships). The Companies Act 2006 definitions by comparison are by reference to parent and subsidiary “undertakings”, which includes partnerships or trading unincorporated associations.  However, the use of the latter entities in property development is limited and it seems that the focus of the Bill is to capture developers using shell companies.

Given the potentially wide nature of these provisions, it remains to be seen whether they will appear in the final Bill and become law.

Who can apply for a Building Liability Order?

The Bill does not limit those who can apply to the court.  In principle, one would expect an occupier or occupier to lead an application, or perhaps a landlord left with costs. However, the 5 April amendments to the Bill provide perhaps a hint at who might benefit by the introduction of a further “companion” order to enable an applicant to obtain information as to who might be an “associate”. However, to use such an order requires you to be within the “prescribed description”, and such description is to be determined by the Secretary of State.

What are the limitations?

As mentioned above there must be some originating liability – this is not necessarily a given.  Outside of that the court is given just and equitable discretion.  The phrase “just and equitable” has been judicially considered in the context of insolvency law.  The phrase was considered to be one of general application, not requiring the demonstration of behaviour that was “unjust and inequitable”.  Given the Parliamentary debates and clear direction of the government, it is likely that the court will give this a broad application.

What is the end game?

The Bill is not yet final.  The extension of normal liability periods (6 years) to 15 years and the extraordinary 30 years has caused consternation in property circles.  Simple evidential hurdles may create issues in establishing any liability.  Who will have accurate records going back that far?  However, the Government is on a drive to hold developers, professional team members and contractors liable to rectify building safety risks. 

As a developer you may need to look over your shoulder. 

If a claim were to arise then redress against other parties will almost certainly be reviewed.  Typically, though contractual limitation periods will be 12 years. Moreover, contractual arrangements may have been set up on the assumption that only specific entities will face liability and loss due to design and construction errors. . Therefore, for those other entities now facing potential liability the necessary contractual redress down the chain design and construction chain may not be possible.  Perhaps,  other parties will need to be joined to a Building Liability Order action, if indeed the legislation will allow? Otherwise, they could be left high and dry. Equally concerning is the difficulty the professional indemnity insurance market poses both for historic claims and (the already heavily prescribed) future claims risk.

For those looking to the future, questions will no doubt arise as to whether project structuring offers any practical solutions, and whether changes to construction documentation will allow the expansion of both limitation periods, and those categories of people who are able to enforce contractual obligations.


1. In this article, references to the Bill are to the 29 March 2022 version, as released by the House of Lords.

2. [1897] AC 22