A government-backed remediation loan facility could break the deadlock holding up unsafe building repairs

A key premise of the Building Safety Act 2022 was that qualifying leaseholders would not pay to remedy historic building safety defects. But legislation has its limits. While the Act can identify who should pay, it cannot find monies where the culpable parties and their associated companies simply don’t have them.

A government-backed remediation loan facility could help bridge that gap. Where responsibility for building safety defects is established or accepted but the party cannot manage their immediate cost without jeopardising its financial survival, finance would be available for them. Commercial lenders could assess creditworthiness and administer the loans, with the government sharing or guaranteeing the risk. The culpable party would repay the loan, with interest, from future income.

Admittedly, there are hurdles with such an idea. But flaws also exist in the current system. Building safety defects are often highly expensive and their remediation consumes labour, management time and supply chain resources that can’t then be deployed on the new and ongoing projects necessary for the business to continue. Contrast that level of expenditure with the economics of contracting: this magazine’s Top 150 Contractors & Housebuilders analysis put contractors’ average operating margin at just 2.3%.

The Technology and Construction Court’s decision in Crest Nicholson Regeneration Ltd v Ardmore Construction Ltd (in administration) brought such considerations into focus. Ardmore’s circumstances are complicated and the group is appealing the building liability order made against it. Nonetheless, it has been reported as saying that the judgment had affected client confidence, payment terms and certified values across live projects. That potentially damages the revenue stream from which such repairs might otherwise be serviced.

A government-backed remediation loan facility could help bridge [a funding] gap. Where responsibility for building safety defects is established or accepted but the party cannot manage their immediate cost without jeopardising its financial survival, finance would be available for them

This is a problem that predates the Act, as London Borough of Camden v Partners for Improvement in Camden Ltd illustrates. The council’s claim arose from fire safety defects at five tower blocks and was valued by the claimant at approximately £130m. Rather than wait for the litigation to finish, it used its resources and government funding to address the defects. The claim eventually settled for £19m without any admission of liability. The council explained that the parties faced the risk of having insufficient funds to satisfy a judgment. It chose, instead, to prioritise residents’ safety.

Had it been unable to fund the works, their commencement would at least have been delayed. That’s the reality for many claimants. Delay can be helpful to a defendant if the consequences of accepting liability would imperil its survival. Litigation also snowballs into further litigation. A defendant contractor may need recoveries from designers, subcontractors, manufacturers or insurers to afford remedial works. While such arguments rage, people are still living in unsafe buildings.

A contractor or developer may have a viable underlying operation and expectations of future profit yet be unable to meet a large remediation liability when it falls due without plunging into a cashflow crisis. This is the gap the loan scheme would plug. It would not be there to assist businesses that would fail regardless. Homes England’s new National Housing Bank could offer a model for this kind of public-private structure.

The Building Safety Fund has already demonstrated that public money can get works moving before ultimate recovery is decided. The Building Safety Levy, which takes effect next month, on the other hand, is expected to raise £3.4bn over 10 years towards the government’s costs in funding the remediation of historic defects. But, unlike the proposed loan facility, the Levy penalises residential developers irrespective of fault.

Intercreditor arrangements with the borrower’s existing lenders may complicate loan security but a government guarantee could mitigate such risk, while the borrower’s claims against third parties could be charged as collateral. Litigation could still determine who ultimately bears the cost but without the impact of delaying repairs. This proposal contrasts with the government’s excoriated and long-abandoned proposal under which leaseholders would incur long-term debt for remedial works. Instead, the primary repayment obligation would firmly sit with those responsible, with commercial lenders and government sharing credit risk.

 The status quo creates an incentive for defendants whose existence is threatened to draw out each stage of a legal process rather than co-operate in fixing buildings

An obvious counterargument to all this is moral hazard. Taxpayers should not reward companies who, in spite of having built badly, have distributed profits or structured their affairs to leave past liabilities behind. Based on their past conduct, some businesses should not qualify. But the status quo creates an incentive for defendants whose existence is threatened to draw out each stage of a legal process rather than co-operate in fixing buildings.

The government should get something in return for such support. Loan terms would require an agreed scope, programme and repayment obligations. In return, the claim against the borrower for the remediation works being funded could be settled or stayed while it remains able to pursue claims against its designers, subcontractors, manufacturers and insurers, applying any recoveries towards loan repayments. Perhaps this could be considered a Building Safety Fund redux, though reconfigured in crucial respects.

Residents in unsafe buildings cannot wait for perfect solutions or for litigation to run its course. If the goal of the Act is to protect leaseholders effectively, the government must not only reflect on who should pay but how.

Francis Ho is a partner at Charles Russell Speechlys