Part 4: Leaseholder protections, remediation and redress

In this, the fourth and final part of our series looking at the key provisions of the Building Safety Act 2022 (the Act), we summarise the redress provisions set out in Part 5 of the Act insofar as they apply in England. Most of the relevant provisions can be found in Part 5 of the Act, but not all of those are fully in force and not all relevant regulations have been made. Consequently, the position may change as more regulations are made and provisions come into force.

To read:

• "Part 1: Introduction, Relevance and Regulator", click here.
• "Part 2: Building Control, Gateways and Dutyholders", click here.
• "Part 3: Accountable Persons, Registration and the Golden Thread", click here.

As explained in Part 1, getting the right definitions is key to understanding the Act. The starting point is to consider the key definitions used in Part 5 of the Act.

Key definition: Relevant Building

A Relevant Building:

• is a self-contained building or self-contained part of a building;
• contains at least two dwellings; and
• is at least 11 metres high or has at least five storeys.

There are some exceptions for leaseholder-owned buildings.

There are detailed provisions for determining:

• the height of a building; and
• whether something is self-contained.

Note that the provisions for determining the height of a building and whether it is self-contained are not the same as those for Parts 3 and 4 of the Act.

Key definition: Qualifying Lease

A Qualifying Lease is a lease:

• of a single dwelling in a Relevant Building granted for a term exceeding 21 years;
• that reserves a service charge;
• granted before 14 February 2022; and
• which, as at 14 February 2022, was the then tenant's only or principal home (or, if not, the tenant at that time owned no more than two other dwellings in the UK).

A lease will be assumed to be a Qualifying Lease if the first three above-mentioned criteria are met, unless the landlord has taken all reasonable and prescribed steps to obtain a leaseholder deed of certificate (see below) and no such certificate has been provided.

Leaseholder protections

The leaseholder protections in Part 5 and Schedule 8 to the Act set out various measures intended to protect certain leaseholders in Relevant Buildings where there are relevant defects giving rise to a risk of the spread of fire or collapse of the building (or part thereof) requiring remediation (Remediation Work). Those protections include limits and exclusions on the recovery of the costs of certain Remediation Work via the service charge, irrespective of the drafting of the leases themselves. There are detailed provisions for determining what constitutes a relevant defect and which costs are covered.

The key limits and exclusions relating to relevant service charge costs for Remediation Work to Relevant Buildings are that:

• no such costs are payable under a lease of any premises in a Relevant Building where the party who was landlord or superior landlord (or an associate thereof) as at 14 February 2022 was responsible for the relevant defect. Note that this exclusion applies to any lease in a Relevant Building, not just Qualifying Leases;
• no such costs are payable under a Qualifying Lease if:
  • the party who was landlord as at 14 February 2022 met the contribution condition, namely that that landlord's group's net worth at 14 February 2022 was more than N x £2 million, with N being the number of Relevant Buildings for which members of that group were landlords as at 14 February 2022; or
  • the value of the Qualifying Lease as at 14 February 2022 was less than £325 thousand for premises in Greater London, or £175 thousand in all other cases; or
  • it relates to cladding remediation.

Further, no such costs are payable where they relate to legal or other professional services relating to the liability (or potential liability) of any person incurred as a result of a relevant defect;

• otherwise, the recovery of such costs pursuant to the service charge provisions of a Qualifying Lease is limited to the following overall permitted maximums:
  • £15 thousand for premises in Greater London; and
  • £10 thousand for premises elsewhere,

save that in all cases where the value of the Qualifying Lease as at 14 February 2022:

• exceeded £1 million but did not exceed £2 million the permitted maximum is £50 thousand; and
• exceeded £2 million the permitted maximum is £100 thousand.

In any one year, only 10% of the overall permitted maximum may be charged. There are detailed provisions for determining the period during which the permitted maximum applies and for determining the value of the premises at the relevant time.

Where a sum relating to Remediation Work is, notwithstanding the leaseholder protections, still recoverable via the service charge, there are proposed changes to the Landlord and Tenant Act 1985 requiring the landlord to first take reasonable steps to ascertain whether any grant, funding or third-party contribution is obtainable and, if so, to obtain the same first before trying to recover via the service charge.

Where a sum is irrecoverable via the service charge (or recovery is limited) because of the leaseholder protections, the landlord cannot recoup any shortfall by increasing the contributions from other tenants in the building. The landlord may, however, be able to claim against other landlords (past and present) depending on the circumstances.

Leaseholder deeds of certificate and landlord certificates

To understand how the leaseholder protections apply, it is necessary to have access to information that may not be in the public domain and is unlikely to be elicited through normal due diligence.

For example, whether:

• the landlord as at 14 February 2022 met the contribution condition; and
• a dwelling was the relevant tenant's principal home as at 14 February 2022 and, if not, how many other dwellings in the UK the tenant owned at that point in time.

The secondary legislation to the Act makes provision for this additional information to be elicited through the provision of:

• a leaseholder deed of certificate by leaseholders on the occurrence of certain notification dates; and
• a landlord certificate by landlords following the occurrence of certain trigger events.

However, there may still be transactions which do not trigger the requirement to provide this information. Further, the regulations setting out the requirements for these certificates are very complex and it is anticipated that the resulting lack of clarity could generate litigation.

There can be adverse consequences for failing to provide the requisite certificates when required. For landlords, these can include adverse presumptions that the landlord as at 14 February 2022 was responsible for the relevant defect and/or met the contribution condition.

There can also be significant adverse consequences for landlords that fail to follow the procedures set out in secondary legislation relating to the provision of these certificates. For example, if a landlord fails to provide copies of relevant certificates to prescribed parties within the required time limits, the landlord can forfeit the right to recover the relevant remediation costs via the service charge.

Remediation orders, remediation contribution orders and insolvent landlords

Certain interested persons, including anyone with a legal or equitable interest in the Relevant Building (including commercial tenants if the building is mixed-use), can apply to the First-Tier Tribunal for:

• a remediation order from the First-Tier Tribunal requiring the relevant landlord, if they have a relevant repairing obligation, to remedy a specified relevant defect by a specified time; and
• a remediation contribution order requiring a specified body corporate or partnership (being a landlord, developer or associate thereof) to make payments to a specified person for the purpose of meeting costs incurred or to be incurred in remedying relevant defects in relation to the Relevant Building.

Where a corporate body, which is a landlord under a lease of a Relevant Building, is being wound up and it appears there are relevant defects relating to that building for which the relevant company is under an obligation to remedy (or contribute towards the cost of remedying), an insolvency practitioner can apply to the court for an order requiring any associated corporate bodies or partnerships to make contributions and/or payments, where the same would be just and equitable.

Building Liability Orders

Building Liability Orders (BLOs) provide that where a body corporate (the original body) has incurred liability, whether before or after the coming into force of the Act, in relation to:

• claims under the Defective Premises Act 1972 (DPA 1972);
• Section 38 of the Building Act 1984 (civil liability for breach of building regulations, not yet fully in force); or
• a building safety risk,

an application can be made to the High Court seeking to extend that liability to another body corporate where it was associated with the original body at any time between the carrying out of the works giving rise to the liability and the date of the BLO. Given the wide nature of potential claims in relation to building safety risk, there are no limits on the types of building to which a BLO can relate. The court will only order a BLO where it is just and equitable to do so.

Those seeking a BLO may first want to utilise Section 132 of the Act to apply to the High Court for an information order.

BLOs are an example of provisions of the Act piercing the corporate veil.

Building industry schemes

The Act empowers the Secretary of State to create building industry schemes for any purpose connected with:

• securing the safety of people in or about buildings in relation to risks arising from buildings; or
• improving the standards of buildings,

including securing that safety, or improving standard, by ensuring that persons in the building industry remedy defects in buildings or contribute to costs associated with remedying defects in buildings.

There is nothing in the Act limiting building industry schemes to matters concerning residential property only and so there is potential for schemes to relate to mixed and/or pure commercial property.

The Responsible Actors Scheme (RAS), launched in July 2023, is the first example of a Part 5 building industry scheme. Entities that meet the eligibility criteria to join the RAS must do so. There are entry conditions (including entry into the government's Self-Remediation Contract) and conditions for ongoing membership. Failure to join and continue to comply with the membership conditions will result in the entity being placed on the prohibitions list. If placed on the prohibitions list, the entity will effectively be blocked from the UK residential market by:

• planning rules which will prohibit it from carrying out major development (which can include some commercial development) in England, even if they already have planning consent; and
• restrictions on the ability to obtain building control approval.

Other key provisions

Among the other notable provisions of Part 5 are:

• the limitation period for claims under Section 1 of the DPA 1972 (claims for defective work in connection with the provision of a dwelling) has been extended from six years to:
  • 15 years for new claims; and
  • subject to certain safeguards, 30 years where the cause of action accrued before 28 June 2022. This retrospective extension of the limitation period has already made its way to court (see the Court of Appeal decision in URS Corporation Limited v. BDW Trading Limited);
• a new claim introduced as Section 2A of the DPA 1972 for defective work, undertaken in the course of a business, to dwellings which renders them unfit for habitation. The limitation period is 15 years;
• powers to establish a new homes ombudsman scheme as a forum for owners of newly built homes to seek redress against builders and developers;
• the introduction of a legal requirement (not yet fully in force) for developers to provide a 15-year new build home warranty to purchasers (including those taking leases for terms in excess of 21 years). There will be financial penalties for those that fail to comply;
• the tightening of regulation of construction products, including two new damages claims that can be brought by a person with a legal or equitable interest in the relevant building/dwelling:
  • where a construction product used in construction works causes, or is a factor in causing, a dwelling to be unfit for habitation on completion of those works (limitation period: 15 years);
  • where a cladding product used in construction works causes, or is a factor in causing, a dwelling to be unfit for habitation following completion (limitation period: 15 years for new claims and, subject to safeguards, 30 years for claims where the right of action accrued before 28 June 2022).
• There are also powers for the Secretary of State to require economic operators to pay for, or contribute towards, the costs of remediation works where the operators have been prosecuted for breach of relevant construction product regulations and the use of the relevant product has caused, or contributed to, making the dwellings unfit for habitation; and
• amendments to the Regulatory Reform (Fire Safety) Order 2005.

Key points

• Parties should review their property portfolios and undertake due diligence on any proposed acquisitions to identify buildings that may have defects and which could fall within the redress provisions of Part 5.
• The requirement for a Qualifying Lease to have been granted before 14 February 2022 causes issues where statutory rights of extension are being exercised by residential tenants. In the process of extending the lease term, the lease is effectively surrendered and re-granted after 14 February 2022, and so the new lease does not qualify as a Qualifying Lease. In these circumstances, contractual provisions may be necessary to ensure the tenant continues to have the same protection as it did under the Qualifying Lease.
• As Qualifying Leases benefit from more protections than other leases, landlords will want to ensure that they have taken every reasonable and prescribed step to avoid the presumption that a lease is a Qualifying Lease.
• It is in all parties' interests (i.e. landlord, residential tenants, other tenants) to familiarise themselves with the leaseholder protections to understand the extent to which each party is benefited/burdened by the same.
• Any party holding or acquiring the reversionary interest in a Relevant Building should ensure that they have all the information that would otherwise be contained in a leaseholder deed of certificate and landlord certificate. The CPSEs have been amended to raise an enquiry for the handover of this information.
• As several of the redress provisions in Part 5 of the Act pierce the corporate veil (for example, BLOs) it may be necessary to amend the due diligence on corporate-led transactions.
• Due diligence and documentation may need to evolve to ensure that counterparties on deals are not on the prohibitions list or in danger of going onto that list as a result of failure to join the RAS or to comply with its membership conditions.
• While it is not clear when the legal obligation to provide new home warranties will come fully into force, developers and purchasers may want to start thinking about this now (either in terms of arranging the relevant warranty or contractually requiring it).

In conclusion, and echoing comments from Part 1 of this series, the Act is one of the most far-reaching pieces of real estate legislation this century. Its effects will be extensive and it would be a mistake not to consider how it impacts you and your real estate.