Removing the façade: A look behind the Building Safety Act 2022

It is five years since the tragic Grenfell disaster but defective cladding/dangerous living conditions and fire safety are still very much hot news. But, you may be asking, why is this relevant to insolvency practitioners? 

The Building Safety Act 2022 (BSA) was enacted on 28 April 2022 with many of its provisions coming into force only on 28 June 2022. According to the explanatory notes to the BSA, its objectives are “to learn the lessons from the Grenfell Tower fire and strengthen the whole regulatory system for building safety”. The Act contains 6 parts and 11 schedules aimed at addressing a range of issues relating to building safety and standards. 

The majority of the BSA is beyond the scope of this article and our insolvency expertise but, buried in Part 5 of the BSA is section 125 entitled “Meeting remediation costs of insolvent landlord”. 

Section 116-125 of the Act are referred to as “leaseholder protections” as they protect leaseholders in multi-occupied residential buildings from certain costs associated with remediating historical building safety defects.

The explanatory notes to the BSA explain the background in more detail which, given the complexity of the issues, is worth going into: 

They explain that most multi-occupied residential buildings in England, such as blocks of flats, are owned by a freeholder, with the individual flats owned on long leases (21 years+). The freeholder typically owns the land on which the building is built, as well as the structure and common parts of the building (such as the staircases and hallways). However, the ownership structures of multi-occupied residential buildings can be complex with multiple additional landlords who own the building or parts of it, separate to the freeholder of the land on which the building sits. The BSA also tries to cater for those complex scenarios all with the ultimate aim that the leaseholder does not end up bearing the cost of works.

It is the freeholder's responsibility to ensure the safety of a building and the upkeep of the structure and common parts. The costs associated with these responsibilities can normally be charged to leaseholders through the service charge, as per the terms of the lease. The service charge will commonly cover the costs associated with routine maintenance and repairs. However, there was concern amongst legislators that the costs of remedial works relating to, for example, defective cladding which sometimes run into £100,000s, would be passed onto leaseholders by way of service charge contributions or by landlords depleting reserve funds. 

The leaseholder protection provisions aim to make those “considered directly responsible for creating building safety defects”, which the BSA deems to be the freeholders, landlords, developers and their associates, to be held accountable through the Courts and prohibit the costs being passed onto leaseholders.

With that background in mind, it is worth exploring the entirety of the wording to examine its potential impact. Section 125 reads as follows:

“(1) This section applies if, in the course of the winding up of a company which is a landlord under a lease of a relevant building or any part of it, it appears—
(a) that there are relevant defects relating to the building, and
(b) that the company is under an obligation (howsoever imposed) to remedy any of the relevant defects or is liable to make a payment relating to any costs incurred or to be incurred in remedying any of the relevant defects.

(2) The court may, on the application of a person acting as an insolvency practitioner in relation to the company, by order require a body corporate or partnership associated with the company—
(a) to make such contributions to the company's assets as the court considers to be just and equitable, or
(b) to make such payments to a specified person as the court considers to be just and
equitable for the purpose of meeting costs incurred or to be incurred in remedying relevant defects mentioned in subsection (1)(b).

Section 124(4) applies for the purposes of this section

(3) An order may be made where proceedings for the winding up of the company were commenced before (as well as after) the coming into force of this section.

(4) In this section—
"act as an insolvency practitioner" has the meaning given by section 388 of the Insolvency Act 1986;
"associated": see section 121;
"the court" means a court having jurisdiction to wind up the company;
"partnership" has the meaning given by section 121;
"relevant building": see section 117;
"relevant defect": see section 120;
"specified" means specified in the order.” 

The added emphasis is ours.

Firstly, a “relevant building” here is defined in section 117 as one that is a self-contained (structurally detached) building with at least two dwellings, at least 11 meters high or 5 storeys high. In other words, what the lay person would consider to be a high-rise block of flats. 

There also needs to be a “qualifying lease” in relation to that building. This means a long lease (21 years+), lease with a service charge obligation, a lease granted before 14 February 2022 and the flat is the tenant’s main home (or the tenant owns no more than 2 other properties in UK). 

The definition of “relevant defect” is fairly complex but essentially means any works on the building in the 30 years prior to the BSA coming into force that may pose a safety risk (risk of fire or risk of collapse etc).

There is a lot to unpack in section 125 and it raises a lot of questions and uncertainties on how it will operate and be applied in practice. However, essentially, it appears the effect of section 125 is to empower the court, on the application of an office holder, to hold someone, other than the company landlord (but related to them), accountable to pay the costs of the remediation works when the landlord goes insolvent and can no longer pay them. All against the backdrop that the tenant shouldn’t have to pay.

The first question on an analysis of section 125 to our mind is which court has jurisdiction? The “court” here is, by virtue of s125(4), the court with jurisdiction to wind up the company. If we apply section 117 of the Insolvency Act 1986 (IA86) then this is the High Court and, therefore, this must mean the Business and Property Courts Insolvency and Companies Court list. Whilst section 117 IA86 also confers jurisdiction at county court level, it is unlikely that company landlords with an issued share capital of less than £120,000 are going to fall under the remit of the BSA anyway.

The second question is – who is a person “acting as an insolvency practitioner” i.e. who has standing (locus) to make an application? The answer may seem obvious - on the face of it, section 125, appears to apply only to winding ups i.e. liquidations and, therefore, only liquidators have locus to make an application – see s125(1). 

Yet s125(2) goes on to state that an application can be made by a person “acting as an insolvency practitioner”. This term is then defined in s125(4) by reference to the definition of that term in section 388 IA86. Section 388 defines a person “acting as an insolvency practitioner in relation to a company” as including not only liquidators but also provisional liquidators, administrators, administrator receivers, monitors, and nominees or supervisors under a CVA. There may therefore be an argument that an anomaly has crept into section 125 and it applies beyond just liquidations but to a much wider class of insolvencies and office holders.

Our next question is then – given the discretionary nature in which section 125(2) is framed (the court “may” make an order) and the onus being on the officer holder to voluntarily bring an application is: why would a liquidator do so?  In other words, what is the benefit to the estate and the creditors in the liquidator incurring significant time and costs in doing so? 

The answer it seems to us lies in the two different types of order that appear can be made. The court can make an order that another company or partnership “associated” with the landlord either (a) makes a “just and equitable” contribution to the insolvent company’s assets or (b) makes a payment to a specified person named in the court order for the purpose of meeting the costs of the works.
 
The appeal of an application by a liquidator, specifically, for an order only under section 125(2)(a) seems to us to be incentivising. This specifically states that payment is by way of contribution to the company’s assets. Applying insolvency law, the recoveries would go into the general pot for the benefit of all creditors. They then must be distributed in accordance with the usual rules on priority meaning the liquidators’ fees and expenses get paid first, then preferential creditors etc etc. Depending on the level of liabilities in the liquidation it is feasibly possible the money recovered under a section 125(2)(a) order will be entirely swallowed up by other company creditors and not go to cover the costs of the remediation works. This surely cannot be what the BSA intended. 

It would appear an order under section 125(2)(b) to order payment to a “specified” person, meaning someone specified in the court order, may remedy that problem. On one reading, that could mean a payment to a construction company/developer specialising in remedial works but the wording is arguably wide enough to cover any person including the liquidators themselves. A more complex legal issue would then arise akin to a type of Quistclose Trust argument, the payment being made for the specific purpose of covering the costs of the works must only be used for that purpose and no other. A payment on those trust terms to the office holder would clearly fall outside the general pot due to creditors and the ordinary priority rules under insolvency law. Whilst that would appear to achieve the purpose of the BSA, it does not benefit the company’s creditors and begs the question why any liquidator would make such an application and who would fund it? Indeed, arguably, any liquidator doing so would not be complying with his duties to the body of creditors as a whole if there was no tangible benefit to them but the estate bears the cost of the application.

A further question left unanswered is how the courts will interpret “just and equitable” to quantify the contribution or payment required? This is left entirely at the discretion of the court and whilst it is not a foreign concept to ICC judges there is no indication in the BSA to assist the court in exercising its discretion and no caselaw yet to guide them. An equitable sum could arguably include a full indemnity for the costs of the remedial works or only a small contribution to them. The former justifies the application costs; the latter does not. 

It also strikes us as highly likely that the respondent to any application is likely to hotly contest an application, thereby putting an office holder, potentially, at risk on costs if such application fails. Again, why should the company’s creditors, who ultimately bear the burden of those costs if they fall as an expense of the liquidation, if there is no prospect of a benefit to them in bringing the application in the first place?

The ambit of section 125 cannot be overemphasised. Section 125(3) makes it clear it has both retrospective and prospective effect. Relevant insolvent landlord companies that went into liquidation pre-28 June 2022 are therefore also susceptible.

Finally, the definition of “associates” under section 121 is also extremely wide, much wider than the definition in section 435 IA86 that practitioners will be used to, and therefore has the potential to capture a very large pool of potential respondents to any section 125 application. Whilst it presents opportunities for recovery into an otherwise barren liquidation it also presents much complexity and risk.

It remains to be seen just how significant an impact section 125 will have but as we stare down the barrel of another long recession, there is a high chance real estate and construction will be adversely affected and many landlord companies may be tipped into insolvency. Office holders may then need to get to grips with the complexities of the BSA.

further information 

If you have any questions or concerns about the content of this blog, please contact Lucy Edwards or Claire Lamkin. 

 

ABOUT THE AUTHORS

Lucy Edwards is Legal Director in Kingsley Napley’s Dispute Resolution team, based in London. Lucy has a wealth of experience in insolvency across numerous sectors in both contentious and non-contentious corporate and personal insolvency.

Claire Lamkin is a Partner in the Kingsley Napley's Real Estate and Construction team providing advice, representation and support across the full spectrum of property matters including commercial and residential disputes.