Aaron Harlow and Ian Hardman examine the tough new measures that are being taken to force the real estate industry to pay to remove cladding - protecting leaseholders from costs.

The Department for Levelling Up, Housing and Communities (DLUHC) has requested that residential property developers fund and undertake all necessary remediation of buildings over 11m that they have had a role in developing. This includes buildings both 11-18m and 18m+.

The proposals will see the sector pay to fix historical problems, “freeing hundreds of thousands of innocent leaseholders from shouldering an unfair financial burden while also enforcing a common-sense approach to avoid unnecessary work,” – as recently described by Secretary of State for Levelling Up, Michael Gove. 

A vast number of firms may now find themselves facing large contingent liabilities that they may have accounted no provision for – some reports estimate that cladding remediation works could be in the region of £5m - £6m per case. 

The DLUHC also wants developers and manufacturers to commit to payment towards a fund to remediate unsafe cladding on 11-18m buildings where direct remediation has not occurred or cannot occur. The DLUHC has stated that the remediation costs are currently estimated at £4bn. 

Building safety is a priority for the government, with the DLUHC looking for developers and manufacturers to agree to solutions now or face government-imposed solutions such as blocking planning permission and building control sign-off on developments that will prevent the building and selling of new homes. 

The DLUHC has announced that over 35 developers have signed a pledge committing to remediate “life critical fire safety works” in buildings over 11m that the developers were involved in developing and refurbishing in the last 30 years in England. These developers have also agreed to reimburse any funding received from the government remediation programmes in relation to these buildings.

The government has also confirmed that the Building Safety Levy will be chargeable on all new residential buildings in England. This has widened the scope of the Building Safety Levy, which will be implemented as part of the Building Safety Act through secondary legislation. This change is expected to raise an additional £3bn over 10 years from developers. 

On 13 April 2022, Michael Gove wrote to the Construction Products Association stating that as a consequence of manufacturers failing to come forward with proposals to date, ‘I have instructed my officials to do whatever it takes to make sure that construction product manufacturers are held to account through the powers that I am establishing in the Building Safety Bill. My new recovery unit will pursue firms that have failed to do the right thing, including through the courts.’

While some firms have made provision in their accounts for building safety repairs, others may not be so prepared and the extent of liability and future costs in relation to this issue may be hard to predict.

We may also see a rise in claims against those in the supply chain that were responsible for the design and build of these properties. The Building Safety Act also includes new provisions to extend the limitation period for breach of the duties contained in the Defective Premises Act 1972 and liability under s.38 of the Building Act 1984 - when this provision is in force. 

Therefore, designers, contractors and developers may have a greater exposure to claims if the work they have carried out is subject to the extended limitation period.

This all puts pressure on an industry already operating against a challenging economic backdrop.

Over the last few years, the industry has been impacted by Brexit and pandemic-related issues, price rises, material delays and labour shortages. 

So, what are the options for companies in the industry facing financial difficulties? 

There is no doubt that the earlier a company can act to head off financial difficulties, the better. The range of options available to it will be from individual negotiations with particular creditors, right up to more formal restructuring options. 

Planning is key with consideration to the issues that may come out of the woodwork to send a business off course; a litigation fighting fund is always a good contingency to allow some protection against unexpected disputes. 

Equally, setting aside funds to take care of future remediation costs would allow businesses breathing space when the unanticipated happens. 

For companies with more concrete financial difficulties, a more holistic restructuring option could include a Company Voluntary Arrangements (CVA) that can allow a company to pare down its liabilities to create a healthier business fit to trade on in the future. 

Shoosmiths has recently acted on a number of CVAs, assisting companies in continuing to move forward with their operations alongside winning new building contracts. 

It is crucial that businesses plan for the financial impact these changes will have, while ensuring that the appropriate action is taken to meet the new obligations. In the worst case scenarios, building a strong understanding of the different restructuring options available can be the difference in a firm being able to continue to trade or failing completely.


This article features in Shoosmiths’ new report: Operating in living