The Building Safety Act 2022 (which started to come into force in April and will have a phased entry over the next two years), continues to have a dramatic effect on the property and construction industry. You may be aware of the initial headline coming out of the Act that liability periods for defective/unsafe residential premises have been extended to 30 years for existing buildings and 15 years for new builds. That liability period has also been altered so that the Defective Premises Act 1972 not only covers the original construction of the dwelling but also any later refurbishment to cover any cladding problems that have subsequently come to light. However another fundamental part of the Act came into force on 28th June 2022 relating to the use of Special Purpose Vehicles (SPV) which could have a significant effect on the approach to procurement strategy and risk allocation for both residential and commercial development.
It is very common for developers to use an SPV in the form of a limited company with limited assets in order to ringfence the liability in a particular property. Often those SPV companies disappear after a fixed period of time - perhaps when a tenant takes on full liability after the defects period, or the property is sold or the residential management company takes over. However the use of SPVs to mitigate development risk must be reconsidered in light of the Building Liability Order mechanism that will be available shortly to both residential and commercial occupiers.
A Building Liability Order is designed to ensure that all those directly involved in the development and construction of a building cannot avoid liability in the event the building is found to be defective and thus unsafe. It allows the occupier to sidestep the legal rules of privity of contract, which (absent collateral warranties or statutory rights) prevents claims against third parties who were not a signatory to the contract, with the result of joining in the developer to the liability that is carried by the project SPV company. This applies to relevant liability created by the Defective Premises Act 1972 for uninhabitable residential buildings and commercial premises under Section 38 of the Building Act 1984, where there is a building safety risk as defined in the Building Safety Act creating a risk to the safety of people in or about the building arising from the spread of fire or structural failure.
In other words, an affected party may ask a court to make an order joining in the developer as a joint and several party to the original development liability.
The test is whether the developer is associated with the original SPV or another body that controls it, for example, sister companies or group companies, including both limited companies and LLP corporate bodies. It does not matter if the original SPV company has been dissolved, a Building Liability Order can still be made in respect of those associated companies to pick up that development liability.
Connected to this is the right for affected people to apply for information to find out who those associated parties are in order to be able to implement the Building Liability Order mechanism.
Therefore, it is now important to consider whether the attempt to separate liability for individual buildings into a variety of new companies and create a massive group company structure which previously had contractual liability advantages and possibly made it easier to sell on the investment, now has the same benefit when you consider residual liability for defects and safety issues within the building.