The Building Safety Act 2022 and Investors

The Building Safety Act 2022 (the Act) was finally given Royal Assent on 28 April. Its aim? To create a clear pathway on how the safety of people in or about buildings should be managed and to create a new framework for the standard of buildings.

The Act applies to new and existing ‘high risk buildings’ being those over 18 meters or seven storeys high which contain more than one dwelling. Some elements of the Act governing remediation of defects also apply to buildings in England that are at least 11 metres high or five storeys high and contain two or more dwellings. The Act therefore extends to both wholly residential and mixed- use properties.

Previously liability for maintenance and repair costs of completed buildings typically fell to leaseholders. The intention of the Act is to protect leaseholders from the cost of repairing building defects in the early life of their building.

Whilst the thrust of the Act is to make industry (i.e., developers and construction products manufacturers (CPMs) pay to fix building defects the buck will pass to freehold investors where those in industry fall short. Effectively this creates a waterfall whereby developers and CPMs are expected to pay for remediation works initially, then freeholders and, finally, leaseholders subject to a cap on expenditure.

The Act creates a new wave of uncertainty for investors. In the first instance, the Act could diminish the value of buildings which are not compliant with the Act. Investors in such buildings will need to trace the original developer and seek to identify the CPMs involved in the construction of their building so that they can assess their financial ability to meet their obligations in respect of both the investor’s building and any other buildings they are linked to.

This will require understanding the market share of those parties so that a risk assessment can be made of the likelihood of liability ultimately passing to the investor.

The investor’s analysis of the financial viability of the relevant developer or CPM must also take account of the fact that the Act has increased the period of liability for sub-standard construction work from six to fifteen years. This extended responsibility will open the doors to more claims with the potential cost of those claims being difficult to quantify.

Investors may primarily depend on information published by the developer or CPM themselves. However, this information may not be reliable as the developer or CPM may be motivated to downplay their liabilities so that their market position is not adversely affected to the extent that they are no longer able to raise funds or continue to trade.

If either the original developer or CPM cannot be traced or are unable to meet their financial obligations, investors will have to decide whether to seek a buyer for their building who is willing to accept liability in return for a reduction in the price of the investment or to make capital contributions to the requisite improvements. Such a financial liability will not have been contemplated when the investor initially acquired the building, and so would not have been factored into the valuation and price paid.

Similarly, the Act has scope to adversely affect the reputation of investors. The Act requires greater transparency which includes more information being given to occupiers on issues such as compliance with the Act. If an investor is perceived as not meeting its obligations under the Act, its standing could be adversely impacted. This could not only reduce the value of the investor but also its ability to access finance for future investments.

In future investors will need to allocate more resources to investigating whether there are defects in any building it is considering purchasing, including pinpointing the identity and financial status of the original developer and CPM involved in that building.

For more on how we can assist you, please contact Birmingham Commercial
Property Partner Beth Margetson by calling 0121 236 7388 or by emailing
beth.margetson@mfgsolicitors.com