Extended liability: what the Building Safety Act means for construction

The new Building Safety Act extends liability for safety defects out to 30 years, bringing far-reaching consequences for contractors. Joshua Stein investigates

When the Building Safety Act 2022 received Royal Assent at the end of April, it included a five-fold extension to liability for safety defects in residential buildings. The new act modifies the rights set out in the Defective Premises Act, retrospectively extending liability from six years to 30 years after the building’s initial handover.

Extended responsibility comes into effect from the end of June and covers buildings of any height containing at least two homes. It will also increase liability for buildings completed after that date to 15 years from handover.

“The government is rushing ahead and not really working with industry”

Rico Wojtulewicz, National Federation of Builders

The sweeping changes are intended to free leaseholders from responsibility for rectifying dangerous cladding and other safety-related construction faults. It follows the discovery of faults and risks across thousands of the UK’s residential buildings in the wake of the tragic 2017 Grenfell Tower fire, which took the lives of 72 people.

Extending liability out to 30 years will not necessarily clarify exactly who should fix every unsafe home, not least because many older buildings will have been left ‘orphaned’ as developers or contractors went out of business over the past three decades.

This is why developers and cladding manufacturers in England have all been called on to pledge funding to fix issues they may have contributed to in the past. Housing secretary Michael Gove has threatened that those refusing to sign up to the pledge could face punitive measures in the future.

What does it cover?

Liability for defects under the 30-year extension to the Defective Premises Act is ‘strict’, meaning a claimant does not have to prove that the builder knowingly or negligently cut corners. But it is not clear how far the principle stretches to cover current faults.

Rico Wojtulewicz, head of housing and planning policy at the National Federation of Builders (NFB), says the industry remains ill-informed about the types of defects that fall under the new liability regime.

Rico Wojtulewicz

“We haven’t got a list as to what [the act] views as in scope,” he says. “Obviously, we know what typically comes in place, but there are many questions to ask. If there is a heating system which [raises a safety risk], who is liable for that?”

Wojtulewicz adds: “The government is rushing ahead and not really working with industry.”

Peter Caplehorn, chief executive of the Construction Products Association (CPA), drew attention to the same issue in an open letter to Michael Gove in April. He wrote that product manufacturers were “troubled by the lack of detail in terms of scope and definitions” relating to responsibility for safety remediation costs.

No man’s land

Caplehorn tells Construction News he remains “very concerned” at the sudden need to consider the potential impact of work completed 30 years ago. “You see countless examples of information being provided at handover and then being either lost or corrupted or just unattributed,” he says.

“The issue is the legal cost, because proof is going to be really difficult”

Peter Caplehorn, Construction Products Association

Caplehorn acknowledges the need for Dame Judith Hackitt’s ‘golden thread’ of information about a building’s construction as a way to safeguard residents, particularly for buildings constructed after the Grenfell tragedy, but he believes that applying the principle retrospectively will create a host of problems.

In particular, many companies have had a policy of destroying documents 24 years after completion, he says. This practice is likely to leave even the best-run companies with a potential six-year gap in their knowledge.

Peter Caplehorn

“It could be immensely difficult because, effectively, projects will end up in a no man’s land situation,” he explains, suggesting that authorities and industry will be left hunting for documents in local authority archives: “You get to a point where you say, ‘Well, is there any information that exists?’”

The NFB’s Wojtulewicz agrees: “There isn’t a great paper chain in the industry – that is a concern. We are trying to say, ‘check who signed a project off’, but that is not always possible.”

Even working out whether older work was done in-house or contracted out could be difficult in some instances, hindering the process of resolving liability.

Trying to pin the blame

Extended liability arises at a difficult time for construction, following two extremely challenging years. With fast-rising inflation, material shortages, labour shortfalls and the end of the red diesel rebate, the industry “is in a real awful place”, Wojtulewicz says. He raises the concern that retrospective liability may prove to be one burden too many, potentially triggering insolvencies.

Iain McIlwee, chief executive of the Finishes and Interiors Sector (FIS) trade body, says: “The government are saying that the golden end to this road is a rich vein of money that’s going to solve this problem [of remediation costs, but] it’s more likely to end in company administrations.”

McIlwee adds. “Our concern is that it’s going to set the supply chain at odds with each other when we should be collaborating to resolve the problems. This new policy direction seems to be more about trying to pin the blame than solve the problem.”

“Our concern is that it’s going to set the supply chain at odds with each other when we should be collaborating to resolve the problems”

Iain McIlwee, Finishes and Interiors Sector

Developers hit with big bills due to extended liability may attempt to pass costs along their supply chain, which could leave smaller companies ultimately footing the bill.

Wojtulewicz says: “A small contractor, which may not be at fault, will find it very difficult to find the legal fees to challenge that.”

As a result, he predicts that smaller companies may try to limit future liability by becoming more cautious about the kind of work they take on, and who they work for. “They might try to build fewer homes, or fewer sustainable homes, to stay afloat,” he argues. “It is not good for the housebuilding supply sector.”

In addition to this threat to the government’s housebuilding goals, Wojtulewicz adds that another unintended consequence could even be a decline in the average quality of new homes, as responsible firms retrench, leaving the less scrupulous to fill the void. “You are limiting the pool of subcontractors you are working with. That might mean there are fewer of the good subcontractors to work with […] Is that going to affect building issues going forward?” he asks.

Money wasted in the legal route

The CPA’s Caplehorn also raises the industry’s “tendency to reach for lawyers first, rather than trying to compromise and collaborate”. He notes that legal wrangling over responsibility for historical defects will lead to delayed remediation – and a ton of money being spent on law firms’ fees.

Iain McIlwee

The FIS’s McIlwee worries that legal disputes over extended liability could act like the burden of direct responsibility and push some companies under. “The issue is the legal cost, because proof is going to be really difficult,” he argues. “We’re looking at the performance of the building now versus the regulation at the time.”

The impact of longer liabilities on insurance is also on everyone’s mind. Insurance firms are already cautious about the construction sector, with premiums for professional indemnity (PI) policies skyrocketing since 2017. As reported recently by CN, some firms have seen 1,500 per cent price hikes over that period.

Some fear the situation will get worse once underwriters add in the risks associated with buildings constructed decades ago. Either premiums will rocket further or more sweeping exclusions will be put into policies as the first claims begin to roll in, McIlwee predicts. “It’s always theoretically possible to get insurance. But the cost of that would be prohibitive because what insurer is going to pick up effectively an uncapped liability?” he asks.

“The government needs to ensure that the money it collects and is earmarked for the BSF ends up in the BSF, and the fund is administered properly”

Iain Benson, Cripps Pemberton Greenish

With higher premiums likely to be seen at every point along the supply chain, contract costs may go up as insurance costs are passed along. “I don’t know how we would quantify all of this,” McIlwee adds, saying it is “theoretically possible, but economically not viable” for everyone to pass costs along.

The impact is uncertain because 30-year liability is an uncharted area. James Bainbridge, team leader for professional indemnity insurance at insurance broker Marsh, says it is difficult to predict how the market will react: “We haven’t seen anything quite like this before – this is fairly new territory.”

Bainbridge adds that “the goalposts are continually moving” as the government has turned its focus from suppliers to developers and contractors, and from thresholds of 18 metres to 11 metres to buildings of any height. The uncertainty created has not been good for market confidence among insurance providers, he suggests.

But, with the Building Safety Act now passed, there is hope that clarity will help market confidence return, Bainbridge says, even if 30-year liability may have been “a little arbitrary” as a final timescale. “Now we are where we are,” he concludes. “That said, contracting 30 years ago was very different from how it is now.”

Along with contractors, insurers are likely to struggle with a lack of documentation. “Given what record keeping was like in the early 90s, compared to now, it’s going to be challenging,” Bainbridge adds. “That’s the most obvious concern.”

Drawing out the problem

Given the likely paperwork problems and the prospect of extended legal battles, leaseholders may still face years trapped in unsaleable properties scarred by dangerous cladding. Could extended liability even prove to be a solution that is barely worth having?

“What will really resolve the problem is the BSF and ensuring it is funded properly”

Iain Benson, Cripps Pemberton Greenish

Iain Benson, legal director at law firm Cripps Pemberton Greenish, says the new regime may turn out to be unworkable and amount to little more than “a series of eye-catching statements”. “It sounds very dramatic and punishing, but I seriously wonder how many residential occupiers in cladding will benefit in the next 15 years,” he says.

Benson suggests the government’s Building Safety Fund (BSF) is a more practical intervention. “What will really resolve the problem is the BSF and ensuring it is funded properly,” he argues. “The government needs to ensure that the money it collects and is earmarked for the BSF ends up in the BSF, and the fund is administered properly.”

Benson adds: “This is really how the cladding problem will get resolved, not by fiddling around with limitation periods under the Defective Premises Act.”

Iain Benson

The government has hesitated to pay to remediate medium-rise buildings after it earmarked £5.1bn to fix high-rises through the BSF. But the FIS’s McIlwee says upfront payment by the government remains the best way to circumvent protracted legal wrangles.

He cites the precedent of the 2005 Pension Protection Fund, a “cracking example of good government”, which created a scheme to underwrite 90 per cent of pensions if a fund goes bust. This ensures innocent victims – current and future pensioners – are not left penniless by a fund’s insolvency. The cash required is raised through a levy on all pension schemes. That is an effective solution to a problem of a “similar magnitude in cost”, McIlwee says.

Wojtulewicz from the NFB agrees that funding fixes upfront and then tracking down the culprits afterwards is the best way for government to apply its ‘polluter pays’ principle. “Taxpayers should have covered the remediation to free [trapped] leaseholders and then the government would be able to track down polluters,” he says. “That would have been a sensible way to do this.”

The grim reality

With retrospective liability due to come into force from 28 June, the industry is bracing itself for the impact. Wojtulewicz says companies should start by assessing the scale of risks and how much might be covered by existing policies: “We’ve been saying check your insurance, and try to find details of the work you completed and whether it was subcontracted.”

CPA’s Caplehorn gives similar advice. “[Firms] can identify projects where they know all the details and they’ve got the record well established,” he says. “But, equally, they might have some projects where the record is less than rosy, so they’ll know ahead of time where problems might arise.”

He says the industry must embrace digital record-keeping to maintain the ‘golden thread’ for building safety. “We need electronically-based, robust records to make sure things are easy to identify.”

Designed to hit the industry

Legal expert Benson warns that raised costs are now almost inevitable, given that the government’s aim is to claw cash from the industry: “The whole idea is that the government has changed the law to expose contractors to a wider class of claims than would have previously been the case. That’s their intention.”

Even those who sympathise with the plight of leaseholders may find the result hits them hard, the CPA’s Caplehorn warns: “I’m not suggesting that people should get away with things, but I am suggesting that 30 years is a very long period.”

He predicts that the government may even be forced to rethink extended liability, as the consequences shake out over time. “The 30-year period maybe needs another level of discussion, so that you don’t end up destroying large parts of the industry,” he concludes.

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