The Act is a long and detailed piece of legislation. It is accompanied by explanatory notes which help to explain some of the reasoning behind many of the sections. One of its primary purposes is to ensure that cladding and other fire and structural risks in residential buildings are rectified at limited (or no) cost to those living in the buildings. This is only one of its aims. It is more far reaching that that alone, and also looks to the future to improve safety in high-rise residential buildings, and in some cases all buildings of whatever height.
There are three key themes which run through the Act which are of particular relevance to litigators.
- A move towards the piercing of the corporate veil
- New claims on the statute book, especially in relation to construction products and an expansion of the Defective Premises Act (which plays an important part in a number of the changes brought about by the Act)
- The extension of the limitation period in some instances, to either 15 years or 30 years
What does “piercing the corporate veil” mean?
For over 100 years the position has been that, subject to some very limited exceptions, a company will be treated as a separate legal entity from both other companies within the same group (including any parent company) and its shareholders. The limited exceptions where the separate legal personality of a company can be disregarded, is known as “piercing the corporate veil”. The Act radically introduces a number of concepts which challenge or pierce the corporate veil.
Building Liability Orders
The first and most far-reaching concept is the Building Liability Order (section 130 of the Act).
This provides that an application can be made to the High Court that the liability of a body corporate can be treated as the liability of another body corporate in one of three circumstances:
- as a result of “a risk to the safety of people in or about the building arising from the spread of fire or structural failure” – this is by far the most far reaching of the three circumstances
- under the Defective Premises Act 1972
- under section 38 of the Building Act (please note section 38 is not yet in force).
In other words, a company (which has no direct liability) could be held liable for the liabilities of companies it is “associated” with in the three circumstances (once section 38 is in force) referred to above.
An associate is defined under section 131 of the Act. The definition is detailed, but includes (a) where body corporate A controls body corporate B; or (b) where a third body corporate controls both body corporates A and B.
As an unrelated but important point, although the Act is regarded as addressing issues with high-rise residential buildings, the scope of a Building Liability Order is not restricted to such buildings. It covers the situation where there is “a risk to the safety of people in or about the building arising from the spread of fire or structural failure”. This contains no restriction on the type, or height, of the building. So, an order could be sought, for example, in relation to an office block, a hotel or a hospital or care home however tall they may be. This seems to be intentional on the part of those that drafted the Act.
The explanatory notes are quite specific. They state (in relation to Building Liability Orders):
“Apart from under the Defective Premises Act 1972, which relates to the provision and refurbishment of dwellings, there is no constraint on the types of buildings a relevant liability can be incurred in relation to and therefore no constraint on the types of buildings for which a building liability order may be requested” (clause 1065)
The Act also assists a party considering applying for a Building Liability Order, where perhaps they are not sure which are “associated” companies. It introduces the concept of an Information Order (section 132 of the Act), where an application can be made to the High Court for an order that a body corporate provides information or documents about persons “associated” with them. The purpose appears to be to enable a decision to be made as to whether there is sufficient evidence to apply for a Building Liability Order.
Building Safety Risk Defect(s)
The other part of the Act affecting the corporate veil relates to the remedying of a defect arising from works to a self-contained building (or part of a building) which contains at least two dwellings and which is at least 11 metres high or has at least 5 storeys. It applies where the defect causes a risk to the safety of people in or about the building from the spread of fire or the collapse of the whole or part of the building in the 30 years ending on 28 June 2022 ie, between 28 June 1992 and 28 June 2022 (Building Safety Risk Defect(s)).
Any landlord who under the terms of a lease is required to repair or maintain such a Building Safety Risk Defect must pay for the total cost of any remedial works to remove or replace any part of a cladding system.
The issues with the piercing of the corporate veil arise in relation to any non-cladding Building Safety Risk Defect(s). If the landlord, or a person with whom it is associated, is responsible for the works that have caused the Building Safety Risk Defect(s), the landlord must pay all the costs of rectifying the defect. The landlord itself does not have to be responsible for the works that caused the Building Safety Defect(s) but will find itself liable to pay if a person with whom it is “associated” is responsible for the original works. (The definition of “associated” in section 121 is more detailed than that for Building Liability Orders.)
The Act goes further. If the landlord or persons with whom it is associated with known collectively as “the landlord group” has a net worth exceeding £2 million per affected building owned by the group as a whole as at 14 February 2022, it will have to pay the total cost for the rectification of all Building Safety Defects, even if none of the group companies were responsible for the original works that caused the Building Safety Risk Defect(s).
Remediation Orders and Remediation Contribution Orders
The Act considers what will happen if rectification works are not undertaken by the landlord. Certain bodies (including those with a legal or equitable interest in the relevant building, a fire and rescue authority and the Secretary of State) can ask a First-tier Tribunal to make an order requiring the landlord to rectify the Building Safety Risk Defect(s). This is known as a Remediation Order and of itself is relatively straightforward in that it does not challenge the corporate veil. However, the Act also introduces Remediation Contribution Orders which again can be sought from a First-tier Tribunal.
Remediation Contribution Orders can order payments to be made by a person “associated” with a landlord or a developer of a relevant building in respect of the remedying of Building Safety Defect(s).
So, for example, a landlord could seek a Remediation Contribution Order against a developer or persons associated with the developer. Another example is that leaseholders or a fire and rescue authority could seek an order against a landlord or persons associated with the landlord. In either case, this involves piercing the corporate veil.
Only insolvency practitioners can apply for this type of order. It is actually not called an insolvency order in the Act, but it feels like the best way to describe it. An insolvency order can only be applied for during the winding up of a company and the company being wound up has again to be a landlord of a self-contained building (or part building) which contains at least two dwellings and which is at least 11 metres or 5 storeys high and which has Building Safety Risk Defect(s) (including cladding) for which the company is liable to remedy or pay towards the costs of remedying.
The insolvency practitioner can ask a court to make an order that a body corporate or partnership “associated” with the company being wound up contributes to the insolvent company’s assets or makes a payment to a specified person in order to meet the costs incurred or to be incurred in remedying the defects. This is another example of the piercing of the corporate veil.
The Building Safety Act deals with issues directly arising from Grenfell but it also addresses wider issues within the construction (and construction products) industry.
This note deals just with the piercing of the corporate veil. If you would like to read about the new claims introduced by the Act and the increases to the limitation period, click here for new claims and here for limitation periods. If you would like to know more about the Building Safety Act generally sign up to our construction blog and search under fire safety issues (including cladding) or follow our construction and engineering LinkedIn page.