Building Safety Act: Questions to keep front and centre

Archie Campbell, Catriona Berman and James Styles conclude their two-part series on 12 things to check when buying a mixed-use building following the enactment of the Building Safety Act 2022. In part one we looked at the first five of 12 key things to check when buying an existing mixed-use building that is predominantly commercial but which has a couple of residential units. We identified the importance of: establishing the number of residential units and how tall the building is; identifying who the accountable persons and principle accountable person are; making sure that they have complied with their obligations historically; and that they know what to do to comply going forward. Here we address items six to 12 that you need to check. Check the “gateway 3” completion certificate Once the development of a higher-risk building (or substantial works to it) is complete, a “gateway 3” completion certificate must be issued before any residential unit in the building is occupied. While it does not appear relevant in our scenario, if the building had been newly constructed or substantial works had been carried out, you would need to check that the certificate had been issued. Check that the building has been registered with the Building Safety Regulator The building should already be registered with the Building Safety Regulator – but check that. Once you have purchased the property you must update the registration information within 14 days and provide further notifications if you become aware of other changes. Find out if a building assessment certificate has been requested by the BSR and/or applied for and/or issued The principle accountable person must apply for a building assessment certificate for a registered building within 28 days of being requested to do so by the BSR. Holding a BAC is not a prerequisite to occupation, but an obligation to apply for a building assessment certificate is triggered by the BSR making a request, which it will do periodically. When applying for a BAC you must send a suite of documents to the BSR demonstrating how you are managing the building. The BSR will issue a building assessment certificate if it is satisfied that the “relevant duties” are being complied with. Relevant duties include the duties to: assess building safety risks; manage building safety risks; provide information; and produce a residents’ engagement strategy. Once issued, the principle accountable person must display the certificate in a prominent position in the building. If there is already a BAC, you will need to check that this has been done. That’s it for the higher-risk building element. Establish the cost recovery implications – remediation-type costs (Note: this point and the next two apply only to “relevant buildings”). Because the building is a “relevant building” (as well as a higher-risk building) there are several limitations on your ability to recover remediation-type costs of taking “relevant measures”. “Relevant measures” are the costs of remedying relevant defects or, in relation to a relevant defect, taking steps to prevent a building safety risk from materialising or to reduce the risk. “Relevant defects” are widely defined in the Building Safety Act 2022 and include any building safety defects that create risks relating to structural failure or the spread of fire. Note that even if no building safety risks have been discovered to date, that does not mean such risks will not be discovered in the future. You cannot recover any costs that you incur in taking relevant measures through the service charge if the landlord (or any person related to the landlord or a superior landlord) as at 14 February 2022 (the “February 2022 landlord”) was responsible for the defect. That limitation applies to all leases in the building (including the commercial leases). In addition, no service charge is payable under any “qualifying leases” (see below) for the removal or replacement of unsafe cladding. Furthermore, no service charge for “relevant measures” is payable under a qualifying lease if the landlord meets the “contribution condition” (see below). Establish if there are any “qualifying leases” Given that many of the protections referred to above only apply to qualifying leases, it is clearly crucial to establish whether the leases are “qualifying leases”. A qualifying lease is a lease: of a single dwelling in a relevant building granted for more than 21 years; that reserves a service charge; granted before 14 February 2022; and which, as at 14 February 2022, was the then tenant’s only or principal home (or, if not, the tenant at that time owned no more than two other dwellings in the UK). Find out if any “leaseholder deeds of certificate” have been provided. LDCs are statements issued by a tenant confirming that their lease is a qualifying lease. Even without an LDC it is often clear that the leases are likely to be qualifying leases, and, from a landlord’s perspective, it is best to work on the assumption that they are qualifying leases until you can show otherwise. For our scenario, let’s assume that LDCs have been provided for the two residential leases, ie they are both qualifying leases. Has the contribution condition been met and has a landlord certificate been provided? You will not be able to charge the tenants of the qualifying leases any service charge for relevant measures, unless you can show that the February 2022 landlord did not meet the contribution condition (or was otherwise exempt). That is the case even if the February 2022 landlord was not responsible for the relevant defects. So it is very important to establish whether the contribution condition has been met. The contribution condition will have been met if the February 2022 landlord group’s net worth was more than £2m times the number of relevant buildings in the landlord’s group on 14 February 2022. You will need the seller to provide you with information to establish the position. Any landlord who believes that the February 22 landlord did not meet the contribution condition must provide a “landlord certificate” at various fixed times within strict time limits, including when demanding service charge for costs relating to relevant measures. The seller should be asked to provide all of the information that is required for a landlord’s certificate, so that one can be produced if ever needed (it may be that it is not anticipated now, but a defect could come to light later). If the seller cannot, or will not, give you the information, work on the assumption that the contribution condition has been met. For our scenario, let’s assume that the seller can provide a landlord certificate and the necessary evidence to show that the contribution condition has not been met. That improves the potential cost-recovery position, but that means that we have to look at yet further limitations on cost recovery. Limitations for low-value qualifying leases If the value of a qualifying lease on 14 February 2022 was less than £325,000 (or £175,000 if the property is outside Greater London) the costs of remediating a relevant defect cannot be recovered via the service charge. Let’s assume the qualifying leases were worth £500,000 each. Limit on service charge in other cases: the permitted maximum If none of the other limitations that would prevent the costs of remediation works being charged through the service charge apply, the amount of the service charge that is payable for relevant measures under a qualifying lease may still be restricted. Service charge costs for remediation works relating to any relevant defect are capped at £15,000 (£10,000 if outside Greater London). If the qualifying leases were worth between £1m and £2m on 14 February 2022, the cap is £50,000; if worth more than £2m, the cap is £100,000. Finally, note that only 10% of the permitted maximum may be charged in any year. Shortfalls – you cannot collect any shortfall from other tenants OK, so you cannot recover some of your likely costs from the residential tenants. You will just shift the costs to the main service charge and let the office and retail tenants make up the difference, right? Wrong. Where the 2022 Act restricts the recovery of service charges, you cannot recover any shortfall from other tenants in the building. You may, however, be able to claim against other landlords (past and present), depending on the circumstances. The final word… Getting your head around the obligations and restrictions in the 2022 Act is not easy, but a logical and systematic review of the rules will show you what you need to do and when. The scenario above is very general, but once you get into real-world detail there are lots of twists and turns in how the Act applies that need to be factored in or navigated around. There are also many limitations and exemptions that this article does not cover but that could apply in your fact-specific situation. If you are ever dealing with a building that has residential units, make sure that you know what your obligations are and what you need to do – this is a rapidly evolving area and specialist advice is a good investment. Archie Campbell and Catriona Berman are partners and James Styles a consultant with Stephenson Harwood LLP Image © Shutterstock