Developers have been given a stark ultimatum – sign up to a contract agreeing to carry out remedial works to unsafe buildings or face the consequences.
On 30 January 2023, the Department of Levelling Up, Housing & Communities (“DLUHC”) sent an open letter to developers requesting that they now make legally binding the commitments they made in a public pledge in 2022. They are being expected to sign a contractual agreement to be responsible for all necessary work to address ‘life-critical fire-safety defects’ (“Relevant Defects”) in residential buildings, over 11m in height, they had a role in developing in the 30 years prior to 5 April 2022. The DLUHC asked for the Self Remediation Terms and Deed of Bilateral Contract - the ‘Developer Remediation Contract’ (“DRC”) to be signed by no later than 13 March 2023, i.e. within a period of just six weeks.
As well as taking responsibility for remediating Relevant Defects, the DRC commits the developer to reimburse taxpayers where public money has already been spent via one of the Government’s Building Safety Funds set up for this purpose. It is supposed to mirror the public commitments made by developers who signed the ‘Building Safety Pledge’ (“Pledge”) last year. However, when one looks at the detail, it goes much further. It is estimated that this commitment will result in the funding of more than £2 billion of repairs. In addition, a further c.£3 billion of revenue will be generated from developers via the Building Safety Levy, a charge on new residential buildings requiring building control approval in England.
Those that do not sign (or fail to comply with the DRC) will face ‘significant consequences’ and will, in practical terms, be prevented from operating in the residential development sector. They also face the prospect of damage to their commercial reputation by being ‘named and shamed’.
How did we get here?
It is now over 5 years since the Grenfell tragedy and there are still large numbers of tall residential buildings which require urgent remedial works to make them safe. Investigations to identify ‘at risk’ buildings revealed that the causes of fire safety risks were much wider than just the use of unsafe aluminium composite material (ACM) cladding. Leaseholders were left trying to force building owners to carry out essential repairs and were then faced with huge service charges as the building owner sought to recover the costs from them. Since then incremental steps have been taken to protect leaseholders:
- 16 May 2018 – Government agreed to fully fund the replacement of unsafe ACM cladding on social sector properties over 18m in height.
- 9 May 2019 – Government agreed to fully fund the replacement of unsafe ACM cladding on private residential properties, over 18m in height, where building owners had failed to do so.
- 11 March 2020 – Government agreed to provide funding to cover the cost of replacing non-ACM unsafe cladding on high-rise residential buildings in England.
- The introduction of the Building Safety Levy was intended to help “ensure no leaseholder in medium-rise buildings faces crippling bills, even when their developer cannot be traced”.
- Following its announcement in April 2022, 49 developers signed up to the Pledge.
- The Building Safety Act 2022 came into force on 28 June 2022. It included protections for leaseholders in buildings over 11m in height preventing costs being passed on to them.
The latest step requiring developers to sign the DRC is clearly aimed at ratcheting up the pressure on them to undertake and/or fund any necessary remedial works, and to fulfil the Government’s objective of protecting leaseholders.
What are the concerns over the DRC?
The first iteration of the DRC was released in July 2022 and was initially deemed “impossible to sign” as it included commitments which went far beyond the terms of the Pledge. Since then, there have been ‘ping-pong’ negotiations between the DLUHC, the Home Builders Federation and developers. As a result, the scope of the DRC has been tightened. Nevertheless, the DRC represents a colossal financial commitment by developers. Developers will be responsible for the cost of remedying Relevant Defects which arise from the design, construction or refurbishment of their buildings. This will include: the cost of carrying out the works plus any cost overruns; the building owner’s / leaseholders’ professional fees and legal costs; the costs of planning and building control approvals; and the cost of decanting residents from the building while the works are carried out. While the developer can rely on any warranty, insurance policy or other rights of recovery, it can only do so if this does not delay the commencement or completion of the works – it is a case of having to pay now and seek recovery later. Provision will already have been made in developers’ accounts for the cost of these remediation works but time will tell whether sufficient funds have been allocated.
Where the works have not yet been carried out, any application made for the building to a Government fund should be withdrawn and the works taken over and completed by the developer as soon as reasonably practicable. Where remediation works have already been undertaken and paid for, the developer must reimburse the relevant Government fund. Payment must be made within 90 days although there are provisions which enable a Payment Plan to be agreed. The DRC also contains provisions requiring the developer to keep the building owner informed of progress and requiring the developer to report regularly to the DLUHC. The developer must use reasonable endeavours to identify all buildings requiring works as soon as reasonably practicable after signing the DRC.
Without doubt, we can expect disputes over what is and what is not covered by the DRC. It contains references throughout to taking action “as soon as is reasonably practicable” or to using “reasonable endeavours” but what will this actually mean in practice? When will a fire safety risk be ‘life-critical’ and therefore fall within the developer’s responsibility? While betterment is excluded, “necessary betterment” is not. How will this be decided?
The DRC excludes developers’ liability for defects which arise as a result of “Alterations” to the building. This includes where there have been changes made to the fabric and/or structure of the building, by a person other than the developer, after the original works were completed; also changes resulting from a failure to maintain the building. This clearly creates fertile ground for disputes.
The commitment to reimburse the relevant Government funds is very demanding. There are limited grounds upon which a developer can challenge and interrogate the amount requested by DLUHC by way of reimbursement, and they will have only 60 days within which to make the challenge with supporting evidence. Any such challenge will be decided by DLUHC at its sole discretion and, if not accepted, will become payable within 60 days. At this stage it is too early to say how matters will play out and whether these provisions will work fairly and effectively in practice.
What are the consequences for failing to sign, or to comply with, the DRC?
The “Dear Developer” letter from the Secretary of State refers to the announcement that the Government plans to introduce a ‘Responsible Actors Scheme’ (“Scheme”) in England under the Building Safety Act 2022. Developers are warned that those who do not sign the DRC will not be permitted to join the Scheme. The Secretary of State will have the power to block non-members from commencing developments for which they have planning permission, and from receiving building control approval for construction that is underway. These measures could have the effect of putting developers out of business. Further, the letter makes clear that the DLUHC will “name and shame” any developer who does not sign up. Investors and customers will also be informed of the risks of dealing with any developer that does not sign. In short, the Government’s message to developers is clear - they must either sign or follow the Secretary of State’s advice “to find a new line of work”.
Even where a developer signs the DRC, it will be vulnerable to a claim by the DLUHC that is has failed to comply. Under the dispute resolution provisions, there will be a window of 10 business days for the parties to ‘negotiate in good faith’ to find a resolution. If an agreement is not reached then a developer could be exposed to the dire consequences of being removed from the Scheme. Accordingly, there may not be much of a ‘negotiation’.
What will be the response?
The response to the 30 January ultimatum has been mixed. 39 major developers signed by the 13 March deadline. 11 did not but some of these may now sign and there have been reported delays around the paperwork being finalised. Some may be keeping a low profile and adopting a ‘wait and see’ approach. Some smaller businesses may be unable to fund the expensive remediation costs and will potentially be forced out of the Market. Some developers may view signing the DRC as important to their brand image. For example, Persimmon has, from the outset, made public its willingness to sign and has stated that the terms of the DRC are consistent with its existing commitments. Developers will no doubt be very alive to the potential for brand damage if they do not sign, and will not want to be put on the ‘naughty list’ by being excluded from the Scheme.
Secondary legislation will be needed to introduce the Scheme and this will take some time. There has been speculation that the decision to introduce the Scheme could be the subject of Judicial Review but this seems unlikely until the detailed provisions are known.
What does the DRC mean for insurers?
With such large sums involved, developers will naturally look to their professional indemnity insurance for any potential line of recovery. Insurers have, at least since 2017, included more restrictive cover and exclusions for risks arising from fire safety and cladding products but there may still be some cover available. Coverage issues will inevitably arise.
There is the issue of whether there is a ‘claim’ capable of triggering the policy where a liability is incurred pursuant to the DRC. Careful analysis of the wording of the individual Insuring Clause(s) will be needed. Do any provisions for mitigation works come into play and have the terms of that cover been complied with? Are there more onerous terms applicable for ‘cladding’ and ‘fire safety’ matters, such as lower aggregate sub-limits of indemnity, higher per building / site excesses, and no reinstatement of limits of indemnity?
With ‘claims first made and notified’ cover, it is necessary to consider when any ‘claim’ was first made, and also whether the policy notification provisions have been complied with. Many developers may have made earlier notifications arising from fire-safety issues. Therefore, issues may arise as to the scope of any earlier notifications and regarding the year of attachment. If there are multiple claims, do they aggregate?
The terms and conditions of the policy will need to be considered carefully. Are there any relevant exclusions, including those relating to taking on onerous contractual liabilities? Has there been any admission of liability? Where cover is triggered, what is the cause of the liability / loss? The DRC envisages developers fixing not only design-related problems but also potentially defective workmanship, which not only falls outside cover but is often specifically excluded. Therefore, an apportionment exercise may be required to strip out remediation costs relating to the latter.
Where the developer has been required to reimburse remediation costs previously paid out from one of the Government funds, what visibility does the developer and, in turn, its insurers have as to the composition of these sums? There would appear to be very limited rights to interrogate and challenge them. Insurers will be keen to understand what rights or recovery a developer may have against its supply chain but will the supply chain argue that the sums the developer has agreed to pay go beyond those which can reasonably be recovered from them? A myriad of other issues can be expected and it remains to be seen what will be the response of the Insurance Market to developers’ requests for indemnity under their professional indemnity cover.
Will the DRC work?
The full impact of the DRC remains to be seen over the coming months. There are concerns that the DRC could stifle the residential development sector and lead to the demise of smaller players. It will undoubtedly cause issues between developers and their insurers. It should, however, help to increase momentum for carrying out essential works. A ‘pay now argue later’ approach is being adopted but is sufficient protection built in to ensure that developers only pay those sums that they are actually responsible for and which they can reasonably seek to recover from culpable third parties?
Nobody can question the Government’s aim to protect innocent leaseholders from the costs of repairs or the need for this work to be completed urgently. However, the resolution should be fair to existing UK developers and their supply chains. There have also been concerns expressed that more needs to be done to hold foreign developers to account - the Scheme will only apply in England – and to ensure that cladding manufacturers and suppliers accept their fair share of responsibility.
Finally, it is interesting to note that the Government’s ultimatum over the DRC occurred just days after the Government admitted that it had to accept some responsibility for the Grenfell Tower fire as there had been failings in the building control system; Michael Gove acknowledging that building guidance was both “faulty and ambiguous”.