UK Building Safety Act: first building liability order made

Building liability orders

One of the more far-reaching elements of the Building Safety Act is section 130, which allows the Court to order that one company’s liability for certain building safety defects can be passed onto or shared with an associated company (a building liability order). The rationale is to prevent developers from avoiding liability for relevant defects where the original contracting party was a special purpose vehicle with limited financial standing.

Building liability orders can be made where the company is subject to a “relevant liability”, which means a liability under the Defective Premises Act 1972 (which requires those involved in the construction or development of dwellings to ensure they are fit for habitation) or for a building safety risk (a risk to people in or around the building arising from the spread of fire or structural failure). 

Background

This case involved an SPV – Click St Andrews Limited – which owned the freehold and headlease of 381 Southwark Park Road, and a right to manage (RTM) company, managing the property on behalf of the leaseholders. 

In 2020, Click entered into a freehold purchase agreement, under which it agreed to remove the roof and add 3 storeys to the building (guaranteed by its parent company). The RTM company then agreed to buy the freehold and grant leases of the new flats to be created on the new upper floors to Click. Click also owed the usual covenant for quiet enjoyment to the leaseholders under their leases.

The roof was removed, and installation of the flats on the upper floors was scheduled, despite adverse weather warnings in place. As result of heavy rain and thunderstorms, there was water ingress into the building. There were also various structural issues arising from construction of the additional floors.

Relevant liability: Defective Premises Act

The RTM company and leaseholders argued that the defects, and breaches of the freehold purchase agreement, meant Click St Andrews was in breach of its duties under section 2A of the Defective Premises Act 1972 for failing to carry out the works to the common parts of the building in a “workman-like or professional manner with proper materials”. 

That claim failed because Section 2A of the Defective Premises Act only came into force after the original works were carried out and so the obligations in section 2A had not applied to the works.

Relevant liability: Building Safety Risk

However, the Court allowed the RTM permission to amend its claim to argue that the fire and safety and structural issues created by the works amounted to a “building safety risk”. The Court had previously held that Click was liable to the leaseholders for breach of quiet enjoyment as a result of the issues.

The court was satisfied that the defects amounted to a “building safety risk”, so the liability for breach of quiet enjoyment was a liability “as a result of a building safety risk” meaning the leaseholders were entitled to apply for a building liability order.

Building Liability Order

Having already established that there was a “relevant liability” the leaseholders then brought an application for to pass Click’s liability to its ultimate parent company (who had also guaranteed Click’s obligations to the RTM under the freehold purchase agreement) under a building liability order on the basis that it was an “associated company”. 

The High Court found that Click’s ultimate parent company was an associated company under section 131 of the BSA, which provides that one company is “associated” with another if one of them controls the other, or a third company controls both of them.

In this case, the parent company owned all the shares in an intermediate company, of which Click was a wholly owned subsidiary. That meant that the parent company could, through the corporate structure, secure that the affairs of Click were conducted in accordance with its wishes. The “controlling or directing mind” of both companies was the same person. 

While the RTM company could have enforced its guarantee under the freehold purchase agreement, the building liability order gave each of the leaseholders direct recourse against the parent company as well. This was one of the reasons the court considered it was just and equitable to order a building liability order. 

While the failures leading to the water ingress were breaches of the freehold purchase agreement and the covenant for quiet enjoyment, only the structural issues which amounted to a building safety risk were (or could be) the subject of a building liability order.

Authored by Paul Tonkin and Lucy Redman.