11 October 2023

Building liability orders lift the corporate veil on developers – Andrew Parker writes for Property Week

Construction Partner and Head of Building Safety, Andrew Parker, has written for Property Week on how, a year on from the passing of the Building Safety Act 2022 (BSA), we are now starting to see the cumulative effect of all the new devices for holding the residential development industry to account for the building safety crisis.

However, Parker adds that: “What we have not yet seen is any clue as to how the High Court will decide what is ‘just and equitable’ in the granting of a building liability order (BLO). The phrase ‘just and equitable’ appears to give the court discretion and introduces huge uncertainty.”

BLOs allow those pursuing litigation to “lift the corporate veil” on special-purpose vehicles being used for developments. In other words, where a company is liable for a building safety risk, a BCO also then enables the associated company to become liable itself.

“This sounds well intentioned”, writes Parker, who holds the same view of the BSA’s retrospective extension of limitation period by 30 years, as well as the Residential Property Developer Tax, the Building Safety Levy and the “contracts requiring developers to fix what they built.”

Looking beyond the impact of developers on this crisis, who may arguably now carry a disproportionate burden in solving the crisis, the government also wants other parts of the supply chain to contribute. Namely, they are focusing on the investors in the manufactures implicated in the Grenfell Tower fire. “The government probably assumes that developers will recover costs through litigation, but it has identified developers as a soft target with deep pockets.”

There is concern, then, that BLOs have gone too far. They pose the risk of “undermining the financial stability of development groups, boosting insurance premiums to cover uncertainty and affecting the feasibility of schemes.

“The complex corporate structures under attack are how property developments are commonly procured; and so to retrospectively create liabilities for companies that would otherwise not have had them is dramatic. It may hit share prices for companies, with knock-on effects for funding and future developments.”

Corporate liabilities

Parker considers whether it was wise to lift the corporate veil in this instance; a mechanism that has been in place for some time and successfully resisted numerous previous arguments against it. Those developers who made corporate acquisitions to enter the residential development market now hold considerable liabilities thanks to these changes in legislation.

SMEs, which the government “has been straining to advantage in the market”, will face real challenges in this new landscape of extended and uncertain liability.

Parker predicts legal challenges, and so expensive litigation, before the rules are fully understood. Any increased reliance on insurers will not help a market that has already hardened and indeed insurers may not even pay out where policies did not consider such liabilities across the group.

A potential workaround Parker raises is via the ownership by individuals rather than companies, since BLOs only apply to corporate bodies. This may however have significant tax consequences.

Parker concludes by writing that: “All of this could give rise to further insolvencies within construction given the market has seen contractors struggle to cope with price increases. Now, they will have to face unforeseen claims.

“The position could have been improved if the meaning of ‘just and equitable’ had been addressed in the explanatory notes. We may find that BLOs are ordered very rarely; but until the courts hear some cases, we will not know and the damage to the industry will have been done.”

This article was originally published in Property Week on 13 September 2023 and can be read here in full (behind their paywall).

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