Distressed assets and the Building Safety Act

Numerous lenders and other stakeholders have found themselves in the position of having lent to or invested in a party owning a relevant building under the Building Safety Act 2022, only to find themselves tied to an asset with ever-reducing value as a result of relevant defects being discovered but not corrected. It is highly likely that, as a result of the relevant defects, the relevant building in such a scenario is worth less than any outstanding lending secured over it. In cases such as this, the owner of the relevant building is likely to be insolvent and, if a company, its directors will be struggling to decide whether to place the company into an insolvency process or tread water for as long as possible, hoping that a solution appears. Appointment of administrators In such circumstances, and on the assumption that the owner is insolvent or is likely to become insolvent, the lender can take control by appointing administrators over the owner, with or without the assistance of the directors. An administrator, if appointed over a relevant person, might be able to make an application to the Building Safety Fund or Cladding Safety Scheme where applicable in respect of relevant defects. The BSF and CSS were set up to aid the timely remediation of relevant defects and fund relevant steps. They  provide funds in respect of which grant applications can be made. Grant applications can be made even if there are potential claims against insurance policies or other third parties. The existence of other sources of funding for the works is not an automatic barrier to a grant application. Claims can be made at any time A very useful decision arrived in R (on the application of Redrow plc and others) v Secretary of State for Levelling Up, Housing and Communities [2024] EWCA Civ 651; [2024] PLSCS 113, where it was determined that “…the BSF guidance required the Responsible Entities to demonstrate only that they had taken ‘all reasonable steps’ to recover the costs of the works from those responsible (through, amongst other things, insurance claims). The BSF guidance did not require the Responsible Entities to demonstrate they had pursued all other claims to final resolution and financial recovery…”. This confirms the possibility of making a claim against the BSF and CSS where an entity has not obtained financial redress from a third party. Confirmation that all avenues need not be exhausted before a claim can be made is hugely important in allowing building cladding defects to be remedied even where the responsible party is insolvent. However, the appetite of any lender or stakeholder in making an appointment of administrators for the purpose of instigating a claim is going to be dependent on the likelihood of improving the level of return to that lender. The existence of the BSF and CSS provide options to funders and other stakeholders who are trapped with a lend into a building with relevant defects. Instead of waiting and hoping for matters to resolve themselves, or calling the loan in and crystallising a loss on any subsequent sale at a reduced value, the lender can appoint administrators with the intention that the administrator will make a claim against the BSF or CSS for the cost of the rectification works in respect of the relevant defects. This can be pursued alongside efforts to recover monies from the responsible parties. Obviously, any such action will only be pursued where professional guidance has confirmed that there is likely to be benefit to the appointor in incurring the cost of appointing administrators through an increase in the realisable value of the relevant building once the relevant defects have been remedied. The costs of the process are likely to be recoverable by a lender depending on the provisions in its lending and security documentation. It is quite common for there to be express provisions for the borrower to be responsible for the costs of enforcement by the lender, with such costs to form part of the debt recoverable from the borrower. In taking this action, a lender improves its own position while also providing benefit to the residents of the relevant building and, potentially, other creditors of the company. After remediation Once the relevant defects have been remedied, the exit options for the appointor and administrators are extensive: The administrators can sell the relevant building, repaying the lender the sums owing, and then dissolve the company or put it into liquidation. The administrators can agree a refinancing of the company and simply exit the administration or exit by way of a company voluntary arrangement or restructuring plan, providing for the survival of the company as a going concern. The lender can agree a refinancing with a third party to acquire its loan and associated security, among other options. The existence of the BSF and CSS provides the potential to make the asset a much more attractive proposition with the relevant defects remedied at limited cost to the lender or stakeholder. Andrew Mace is a barrister at Tanfield Chambers Image © Peter MacDiarmid/Shutterstock