The UK cladding crisis – What it means for building owners, purchasers and investors

• 29 June 2021
• News

What is happening?

Since the tragic Grenfell Tower fire on 14 June 2017, it has become clear that many recently constructed or refurbished residential buildings, particularly taller buildings, are unsafe and require urgent and substantial remedial action.

Grenfell Tower had combustible Aluminium Composite Material (“ACM”) panels which allowed the fire to spread. But it was also the entire external wall system, including the insulation and other materials within the external wall, that was combustible and unsafe. It has now become apparent that many buildings have been built with external wall systems that contain combustible materials and, often, non-existent cavity barriers to stop the spread of fire.

There has been substantial publicity as to the plight of leaseholders facing serious safety issues and hefty service charge bills and a call for Government action to meet all the rectification costs.

But the issue is not limited to residential buildings. It can equally apply to commercial buildings with cladding and there have been particular issues with student accommodation and hotels. And the issue is not limited to cladding or fire safety as it is clear that there has been a far more general failing in relation to defective workmanship, design, and materials.

Response from the UK government

The Government has tried to address the problems being faced by leaseholders and owners of buildings by making available a Building Safety Fund (“BSF”) which includes £3.5 billion to help pay for the cost of remedial works. However, the BSF has been met with substantial criticism as it is considered by many to be insufficient to deal with the large number of affected buildings, the application process is complicated and time consuming and the availability of funds is uncertain and slow in coming.

In addition to the BSF, as part of a longer term strategy, the Government is making changes to the legislation which governs how new buildings are procured, designed and built and then occupied and managed. The Building Safety Act is before parliament at the moment, having undergone a substantial consultation process throughout the property and construction industry. The legislation is expected to come into force by the end of 2021.

What steps should be taken by building owners, purchasers and investors of UK buildings?

It is even more imperative that prospective purchasers and tenants of properties where major works have been undertaken carry out full due diligence on their purchase or letting, especially with older buildings where no warranties may be available and any claim against those responsible is likely to be statute-barred. A claim will ordinarily be statute-barred once six years have elapsed from the breach of contract or when damage first occurred, but it might be 12 years or longer depending on the contract in question and all the circumstances.

Some practical steps that could/should be taken are as follows:

• Obtain a full survey and, where there is cladding consider retaining a specialist façade engineer.
• Make detailed enquiries and obtain all relevant construction documentation and details of available insurance in relation to the works undertaken and materials used. It is particularly important to obtain as-built plans and compare them to the original plans for the building. In some cases it may be appropriate to carry out intrusive surveys of the external wall system to establish what has actually been built and what materials have actually been used.
• Obtain an assignment of all warranties available.
• Establish what certificates, guarantees or reports have been issued and can be relied upon.
• Query/check what tests were undertaken as to products used at the time of construction (such as BS8414 fire safety tests which under the Building Regulations 2010 were required in order for an external wall system which contains combustible materials to be considered compliant with the Regulations).

Andrew is a Partner in our Construction team.

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The new government plan to end unsafe cladding: too little, too late?

Well, not enough and not fast enough. Whilst the additional £3.5bn in funding represents a much need injection of cash, it misses the mark in many respects.

The Recovery Loan Scheme: A Summary

• 21 June 2021
• News

The 31 March 2021 deadline for applications under the previous government-backed COVID-19 loan schemes has well and truly passed, however many businesses still need financial support as they try to recover from the economic effects of the pandemic. The Recovery Loan Scheme (the “Scheme”), announced in the Spring 2021 Budget, aims to do just that. A summary of the Scheme is set out below.

What businesses can apply for the Scheme?

Most UK business that have been affected by COVID-19 can apply for loans or other finance for any legitimate business purpose, including growth and investment. (Businesses not eligible to apply include banks and insurance companies.) Funding is available for businesses of any size, with no minimum annual turnover requirement.

“Any UK business” includes sole traders, limited partnerships, limited liability partnerships, co-operatives and community benefit societies, corporations and any other legal entity which generates more than half of its turnover from trading in the UK. However, newly established businesses may wish to consider whether alternatives such as the British Business Bank’s Start Up Loans programme may be more suitable.

Businesses which have borrowed under any of the other government-backed COVID-19 loan schemes are able to use the Scheme to refinance their existing loan scheme facility, provided the requirement meets the minimum facility size under the Scheme.

What funding is available under the Scheme?

The products available under the Scheme include:

• Term loans and overdrafts of between £25,001 and £10 million
• Invoice finance loans and asset finance loans of between £1,000 and £10 million

Can my business borrow the maximum facility?

Not all businesses will be eligible for the maximum funding of £10 million. The value of funding available will be the lesser of £10 million or a value based on the business’s wage bill, turnover or liquidity needs.

Businesses which have borrowed under any of the other government-backed COVID-19 loan schemes are still eligible to apply for the Scheme, although any amount already borrowed under the Coronavirus Business Interruption Loan Scheme or the Coronavirus Large Business Interruption Loan Scheme will reduce the amount that a business may borrow under the Scheme.

The maximum funding available per borrower group is £30 million, although private equity and venture capital-linked businesses are disregarded for the purposes of defining a group.

When will the loan have to be repaid?

Term loans and asset finance loans accessed under the Scheme are available for up to six years, while invoice finance loans and overdrafts are available for up to three years.

Are interest and fees payable under the Scheme?

Yes. Fees and interest may be payable and these will vary depending on the lender and the relevant borrowing arrangements. However, the effective rate of interest and fees cannot exceed 14.99%.

Is the Scheme government-backed?

Yes. The government will guarantee 80% of the finance in an effort to ensure lender confidence.

When did the Scheme come into effect?

The Scheme came into effect on 6 April 2021 and will be available until 31 December 2021, subject to review.

How can my business apply for the Scheme?

A list of lenders accredited to offer loans under the Scheme is available on the British Business Bank website. There, applicant businesses can search for lenders who provide the type of financing under the Scheme that is best suited to meet their financing requirements.

Will an application always be successful?

Not necessarily. The relevant lender will make a decision as to whether to grant the loan on a case by case basis. Lenders will require evidence that a business can repay the facility, which may include management and historical accounts, a business plan and details of any assets owned by the business.

The Bank of England published a statement on 6 April 2021 setting out the regulatory guidance that a lender should consider before deciding to grant a loan. The statement also highlights the Prudential Regulation Authority’s view that a lender should take into account factors such as the performance of the business prior to COIVD-19 in order to establish the strength of the business and determine its ability to repay the loan in accordance with its repayment terms and not be in default. The particular sector in which the business requesting the loan operates should also be considered to understand the long-term prospects of that business going forward.

Summary

In short, the major draws of the Scheme are:

• no turnover threshold;
• access to larger amounts of funding relative to previous schemes; and
• no personal guarantee for loans under £250,000.

With uptake of the Scheme expected to be similar to that seen with the previous government-backed COVID-19 loan schemes (under which 1.6 million businesses accessed over £75 billion in financing), its availability can only be good news for many small and struggling businesses.

Disclaimer

This note provides a general summary of the legal position in England and Wales as at 18 June 2021. It does not constitute legal advice.

For more information, please contact our Banking and Finance team.

Whole life carbon footprint of buildings

• 18 June 2021
• News

Whilst much of the focus on the decarbonisation of the built environment has been on owners and occupiers working together to reduce the operational carbon footprint of buildings (see our Green Lease Playbook), alongside this, we are increasingly hearing about the importance of addressing embodied carbon – the other key factor in establishing the total carbon footprint of a building.

What is operational carbon?

Operational carbon is a building’s in-use carbon load. It is the combined emissions used by landlords in managing their assets and by tenants in occupying them – the heating, cooling, lighting, ventilating and powering of a building.

What is embodied carbon?

Also known as embedded carbon, embodied carbon is the amount of carbon generated in the process and supply chain involved in producing a built asset i.e. the emissions produced in the construction and development of a building.

Elements contributing to the embodied carbon footprint might include preparatory site works, the extraction, manufacture and delivery of building materials and the carrying out of the construction and infrastructure works themselves as well as any works of repair, replacement and maintenance. One methodology for calculating embodied carbon also includes the emissions resulting from the decommissioning of a building at the end of its lifecycle.

Assessments of how much embodied carbon contributes to a building’s total carbon footprint vary within the range of 10 – 50%. It is important to recognise that, unlike operational carbon footprints, which can be improved over time through the implementation of enhanced energy efficiency measures, embodied carbon footprints are irreversible. As measures to reduce operational carbon in the built environment are becoming increasingly widespread and effective, this means that the proportion of the total carbon footprint attributable to embodied carbon is only likely to increase.

Requirements under The London Plan

The London Plan sets out a requirement for developments to calculate and reduce Whole Life Cycle Carbon emissions. This only applies to planning applications which are referred to the Mayor, however the assessments are encouraged for all major applications. Consultations on both the guidance and template, to be used in assessing the emissions, closed in January 2021.

Planning applications will be expected to use the guidance and assessment template once the final document is prepared, expected in the summer of 2021. It has been indicated that the post-construction reporting of the Whole Life Cycle Carbon Assessments will be secured by planning conditions.

The bigger picture

London is leading the way with assessments of Whole Life Carbon as part of the planning process, which is not currently applicable elsewhere in the UK. It remains to be seen whether these assessments will be incorporated into the changes to the planning system recently announced and will become applicable to other areas of the country. Accordingly, early consideration of embodied carbon at the design and build stage of a development, including whether the repurposing of existing structures is a viable option, together with the implementation of measures such as commitments to using only renewable, recycled and recyclable materials and sustainable procurement methods, will be crucial in the continuing drive towards net zero.

Context Embodied Carbon in Construction Calculator (EC3)

If you are looking at developing new sites and want to make assessments on the project’s overall embodied carbon emissions the EC3 tool may be a useful tool. EC3 was created by nearly 50 construction and property industry partners, and is a free open-source tool that uses building material quantities from construction estimates, BIM models and a database of digital, third-party verified Environmental Product Declarations (EPDs). The tool can be used in the design and procurement phases of projects and already has 10,000 users.
https://www.buildingtransparency.org/

A PDF copy of the article above is also available to download here.

Victoria Towers is a Partner and Miri Stickland is a Knowledge Development Lawyer in our Commercial Real Estate team. Sophie Smith is an Associate in our Planning team.

Our Sustainability Hub

Our sustainability hub brings together the team’s insights and legal expertise on a broad range of environmental matters that affect our clients’ business and personal affairs. This is a rapidly evolving and wide-ranging area of law and we will continue to share our insights about related legal developments on this hub.

If you have to ask… Requesting access to a company’s register of members

• 16 June 2021
• News

The Companies Act 2006 (CA 2006) provides at section 113 that every company must maintain a register of its members containing certain details of their membership, including their names and addresses. Primarily, the register evidences who owns the company, but this personal information can be very useful for a wide variety of purposes, and not just for members of the company. Recent case law has emphasised that applications to obtain the register should be made with care.

For further detail about the significance of share registers, the information to be included in them and what to do if there is an error, please see here.

Previously, under the Companies Act 1985, any person was entitled to obtain a copy of a company’s register of members on application and there were no grounds for the company to refuse such a request. Following evidence that this right was being abused, and that members of companies were open to harassment because their personal information was freely available to any member of the public who wanted it, Parliament qualified the right in the CA 2006. The legislation now provides that although any person may inspect the register of members or request a copy (section 116, CA 2006) and the company must grant access to its register of members within five working days of receipt of such a request (section 117, CA 2006), a company is entitled to apply to the court for permission to deny access to the register if the company considers that the request has not been made for a proper purpose.

Section 116 sets out the information that must be contained in the request:

• The name and address of the person making the request (or if an organisation, the person responsible for making the request on its behalf).
• The purpose for which the information will be used.
• Whether that information will be disclosed to any other person (and if so, that person’s name, address and purpose).

It is crucial that the request contains this information.

The recent case of Sir Henry Royce Memorial Foundation v Hardy considered the validity of an application under section 116.

The claimant company (the Foundation) was, and is, a charity dedicated to the archives of Sir Henry Royce and his eponymous car company. Mr Hardy had served for a few months as finance director of the Rolls-Royce Enthusiasts Club (the Club), an unrelated company but nonetheless closely associated to the Foundation, with some overlapping membership and common board members. The Club provided the Foundation with much of its funding and rented property from the Foundation to use as its headquarters. Mr Hardy was also a member of both companies. After claiming to have uncovered serious wrongdoing by some of the directors of the Club (who were also directors of the Foundation), Mr Hardy duly made a section 116 request to the Foundation to inspect and copy the register of members. The Foundation sought permission to deny that request.

The court granted the Foundation the no-access order it had asked for. When sending his request, Mr Hardy had omitted the required statement as to whether he would disclose the information to any other person. Although he had realised his mistake and had later emailed the Foundation to confirm that he had no intention of disclosing the information to anyone else and the court considered that this statement would have satisfied the section 116 requirement, the request was still deemed invalid because (applying the Court of Appeal’s decision in Fox-Davies v Burberry plc in which it was held that compliance with all the requirements of section 116 were mandatory) all the details were not included in the request at the time when it was sent. The court held that the omission could not be corrected by the later email as the Foundation needed to know where it stood at the time it received the request given the short time period it had in which to decide whether to resist it. The later email did not amount on the facts to a fresh section 116 request.

Although this was enough for the court to dispose of the claim, it also considered whether the request had been made for a proper purpose. Nowhere is ‘proper purpose’ defined in the CA 2006, but ICSA has published some useful guidance and there have been a small number of cases on the point. Mr Hardy’s purpose in making the request was expressed to be to ask the members to convene a meeting to obtain certain information from the directors and to remove five directors of the Foundation for reasons relating to their alleged misconduct as directors of the Club. The court held that the information requests were proper purposes, but the attempt to remove the directors of the Foundation for allegations against them relating to their alleged conduct as directors of the Club was not a proper purpose. This was a mix of proper and improper purposes and, following the dicta of Arden LJ in Burry v Fox, the presence of the improper purpose among the proper purposes would have led the court to grant a no access order.

The case law clearly shows that if you intend to obtain a company’s register of members, you must take care both to comply formally with the requirements of section 116 and to ensure that all your purposes for making the request are proper. A further cautionary note is that, while most such applications are dealt with summarily, Mr Hardy (who was representing himself), somehow ended up in a full trial and was hit by an order for costs of around £100,000. Serious consequences can result from what appears to be an innocuous procedural provision, and a request for the register of members should not be made without due consideration of the risks.

Disclaimer

This note reflects our opinion and views as of 16 June 2021 and is a general summary of the legal position in England and Wales. It does not constitute legal advice.

Andrew is a Legal Assistant in our Corporate team.

Becoming a Director: Knowing your duties and potential liabilities

• 12 June 2021
• News

Becoming a director is a significant step in your career. As a director, you will be responsible for managing the company on a day-to-day basis with the rest of the board and you will have decision-making responsibilities, whether on an individual basis, as part of a committee or at board-level. As such, you will hold a significant amount of power within the company structure.

However, as the cliché goes, with great power comes great responsibility, and it is important that as a proposed director you are aware of your duties and potential liabilities in office.

What are your duties?

The Companies Act 2006 (CA 2006) sets out the general duties of directors. These require a director to:

• Act within powers – Directors must act in accordance with the company’s constitution and only exercise their powers for the purposes for which they were conferred.
• Promote the success of the company – Directors must act in a way they consider, in good faith, will promote the success of the company for the benefit of its members.
• Exercise independent judgement – Directors must exercise their powers independently and make their own decisions.
• Exercise reasonable care, skill and diligence – Directors must exercise the care, skill and diligence that would be exercised by a reasonably diligent person who has the skills, knowledge and experience of a director in the same position and of the specific director in question.
• Avoid conflicts of interest – Directors must not place themselves in a position where there is a conflict or a possible conflict of interest with the company’s interests.
• Not accept benefits from third parties – Directors must not accept any benefit which is given to them by a third party because they are or because they do (or do not do) anything as a director.
• Declare interests in proposed or existing transactions or arrangements with the company – Directors must declare to the other directors of the company the nature and extent of any interest, direct or indirect, in a proposed transaction or arrangement with the company.

For further information about how to comply with these duties on a practical level, see here and as to how they apply to LLP members, see here.

Directors also have responsibilities under other legislation, including in relation to insolvency, environmental, health and safety and employment. In addition, corporate social responsibility requirements are becoming increasingly important to stakeholders, investors, banks and regulatory bodies and directors need to be on-board with these requirements as they affect the individual business, its industry and the market in general.

When will you be liable?

One of the principle tenets of company law is that a company is a legal person, separate to its shareholders and directors; it is an independent entity with its own legal responsibilities. Therefore, as a general rule, company directors cannot be held personally liable for the liabilities and debts of the company. In addition, in civil law, the acts and omissions of directors in the ordinary course of business will be attributed to the company.

However, notwithstanding the protection afforded to directors by virtue of a company’s separate legal identity, they still owe certain obligations to the company, the members and third parties and may therefore incur liability for breaching those obligations.

Wrongful trading

Where a company is in financial difficulty, directors must tread very carefully. If a director is found to have committed the offence of wrongful trading, they can be ordered by the court to contribute to the company’s assets. A director will risk such liability if, in the lead up to the company’s insolvency:

• they conclude, or ought to have concluded, that there is no reasonable prospect of the company avoiding insolvent liquidation (or administration, as appropriate); and
• fail to take every step that a reasonably diligent person would take to minimise the potential loss to creditors.

Wrongful trading is a complex area to negotiate; it does not require any dishonesty on the director’s part and a director cannot avoid liability by resigning from their post when the company enters a period of financial difficulty.

General duties

In addition, a company can itself bring an action against a director if they are in breach of their general duties under the CA 2006 and there are a number of potential remedies available.
Depending on which duty has been breached, the company could bring an injunction or a claim for damages against the defaulting director. Such a claim can also be brought by liquidators in an insolvency situation or, in some limited circumstances, by the company’s shareholders.

Other statutory duties

As mentioned above, directors also have responsibilities relating to other areas, such as environmental and health and safety legislation, breach of which can result in liability. For example, directors may incur criminal liability if it is shown that they have contributed to a breach by the company of the relevant environmental legislation, whether by consent or neglect and can also incur criminal liability if the company fails to comply with relevant health and safety legislation.

How can you avoid liability?

Although the potential liabilities of a company director are significant, there a number of practical steps that can be taken to reduce the risk of your breaching such duties and obligations.

• Know your company – While it may seem obvious that a director should keep abreast of the company’s performance and development, it is vital that you also know your rights, duties and responsibilities under the company’s constitutional documents. Proposed directors should read the company’s articles of association, review the company’s accounts from previous years and find out as much as possible about the company before being appointed as a director. Request to see recent board minutes and don’t be afraid to ask questions about the company, the business and how it is operated. It is also important for a proposed director to determine whether the company has, and the conditions attaching to, any directors’ and officers’ (D&O) insurance, which will cover liability attaching to directors in connection with a breach of their duties.
• Seek independent legal advice – As noted above, directors risk liability for wrongful trading when the company experiences financial difficulties. If a company runs into financial issues, directors should seek independent legal advice as soon as possible to avoid any potential personal liability. More generally, taking independent legal advice about your duties as a director before being appointed will ensure that you are aware of your key responsibilities and provide you with practical suggestions as to how to minimise risk.
• Refresh your skills – The skills required of directors are constantly changing. In recent years, the rise of social media, expanded reporting requirements and an increasing focus on sustainability have altered the priorities of, and the skills required within, boards globally. Now, more than ever, it is important that directors adapt to changing environments, keep up-to-speed with any changes to their legal obligations and ensure that their skills do not stagnate. Attend regular training, seminars and conferences, read relevant articles and have open discussions with other directors about their roles and responsibilities (subject of course to confidentiality requirements) to keep current.

For more information, please contact our Corporate team.

Disclaimer

This note reflects our opinion and views as of 11 June 2021 and is a general summary of the legal position in England and Wales. It does not constitute legal advice.