Corporate Real Estate Transactions in the UK: Beware Remediation Contribution Orders

Background

The Building Safety Act 2022 ("BSA") is a fundamental piece of legislation that introduced a new regulatory regime for higher-risk buildings in England and Wales. Further information about the BSA can be found in our recent White Paper.

Remediation Contribution Orders ("RCOs") are one of the new remedies introduced by the BSA in relation to building safety risks in such buildings. The First-tier Tribunal (the "Tribunal") has the power to order that a landlord or developer of a "relevant building," or a person associated with either of these entities, contributes to the cost of remedying historical fire safety or structural building defects where the Tribunal considers it "just and equitable" to do so. 

Triathlon Homes LLP v Stratford Village Development Partnership and Others is one of the first judgments of the Tribunal on RCOs. The case concerned fire safety defects identified in the East Village, the former 2012 Olympic athletes' village. Remediation works were already underway at the buildings and were funded by the government's Building Safety Fund (the Tribunal finding that "there is no good reason to believe that the remedial works will founder for lack of money, whatever we decide"). Notwithstanding this, Triathlon Homes LLP, an intermediate landlord of social and affordable housing units, brought the action seeking an RCO in respect of its share of the costs only. Given the funding of the works by the Building Safety Fund, the subject-matter of the case concerned whether that liability should stay with the "public purse" (via the Building Safety Fund) or if the Building Safety Fund should be repaid by the developer of the site, SVDP, and its parent company (and associated company of landlord entities), Get Living PLC. On 19 January 2024 the Tribunal ordered that, due to SVDP not having the necessary resources, both SVDP and Get Living should pick up the £18 million in remediation costs and effectively refund the Building Safety Fund these moneys.

Key Issues

The case is noteworthy for a number of reasons and it has broader implications for the wider UK real estate sector as follows:

Developer Liability is the Starting Point

The Tribunal referred to a "hierarchy of liability" under the BSA in which the original developer and its associates sit at the top. The default position in respect of RCOs therefore appears to be that the developer will be liable. In circumstances where the developer cannot meet the costs the Tribunal will next look to its associates (including parent companies). The judgment emphasises that "the Act erodes and elides corporate identity and deprives it of some of its main advantages, but it does so for specific purposes and within specific limits." RCOs allow claimants (which can include interested commercial entities who are not individual leaseholders, such as Triathlon Homes) to seek financial orders against parent and other associated companies where there would otherwise be no liability at all. The Tribunal consistently referred to the BSA's wider aim of shifting liability towards developers.

In keeping with this wider aim, the Tribunal explained that the "public purse" (being the taxpayer-funded Building Safety Fund) did not appear on the hierarchy at all and using funding from the Building Safety Fund should be seen as a "matter of last resort." 

The Application of "Just and Equitable"

In its consideration of whether an RCO would be "just and equitable," the Tribunal mentioned a number of matters that were not of significance in this specific case but may be of relevance in other circumstances. Relevant matters may include whether, in the absence of an order, there would be uncertainty or lack of funding for the remediation works. Evidence from leaseholders that remediation works are being delayed due to lack of funding may also be of relevance. On the contrary, it was considered of little weight that sums may be recoverable under existing contracts (e.g., with the relevant contractor). The Tribunal emphasised that RCOs should be viewed as a separate remedy that is independent to the outcome of any contractual or other claims. 

Changes in Beneficial Ownership

Of some surprise is that the Tribunal did not attribute any weight to the fact that the ultimate beneficial ownership of SVDP had significantly changed since the initial development of the site. Furthermore, the Tribunal clarified that RCOs can be made in respect of all remediation costs relating to the building, even those incurred before the BSA came into force on 28 June 2022. Parliament had decided in introducing the BSA that "irrespective of fault, it is fair for those with the broadest shoulders to bear unprecedented financial burdens." 

The judgment should therefore act as a warning to investors and buyers in corporate acquisitions that they are purchasing the risks attached to the entity that is being acquired. If that entity is (or was) a developer or landlord for the purposes of the BSA this means buying subject to the potential risk of RCOs or other liabilities under the BSA even in relation to acts that were carried out before the BSA came into force. Specifically, the Tribunal found that "When [the ultimate beneficial owner] opted to acquire SVDP it could instead have taken a transfer of the land and buildings, leaving the liabilities of the developer behind, but it chose not to do so for its own reasons, knowing that it was acquiring not only the assets of the partnership but also its liabilities, including latent and consequential liabilities." 

This is perhaps an unusual case, where the Claimant was not an occupational leaseholder, there was no delay to works, and the Tribunal did not find that Get Living had done anything wrong. The Respondents may well consider the finding that "responsibility for the purpose of the 2022 Act is not synonymous with fault" as rather cold comfort in circumstances where the 'public purse' (i.e., the British Government) was the entity in control of the developer during construction and under whose watch the defects were installed. It remains to be seen whether the respondents will appeal the judgment.