The Building Safety Act 2022; recent developments and potential implications for lending transactions

In-depth analysis

Introduction

The Department for Levelling Up, Housing and Communities released guidance on 19 October 2023 on the criteria for determining whether a building is a higher-risk building (HRB) (the Guidance). The Guidance relates to the definition of an HRB during: (1) the design and construction of new HRBs; (2) building work in existing HRBs (including those that become HRBs as a result of the building work); and (3) the occupation phase in the higher-risk regime.

(1) Design and construction of HRBs

Looking first at (1) the design and construction of new HRBs, the Guidance confirms that "to understand whether a proposed new building is a higher-risk building, the Building Act 1984, the Building Safety Act 2022 [(BSA)] and the Higher-Risk Buildings (Description and Supplementary Provisions) Regulations 2023 [(the Regulations)] need to be considered together." For the design and construction part of the regime, HRBs are defined as buildings with at least two residential units; care homes, and hospitals; which are at least 18 metres in height or have at least 7 storeys.

3 key criteria are set, all of which need to be considered, when determining if a proposed new building is an HRB:

use criteria – whether the proposed use meets any of the included or excluded categories of building. Buildings used as a secure residential institution, hotel or military barracks, or containing living accommodation provided by the Ministry of Defence for military personnel will be excluded. The exclusion for hotels does not extend to serviced apartments
legal definition of building - how does the building definition in the Regulations apply to the proposed building structure? Multiple attached structures will be considered one overall structure, provided they fall within the scope
height and storeys – how do the methods for measuring height and storeys in the Regulations apply to the proposed new building? For a building to constitute an HRB it needs to meet either the height or storeys threshold, and not both. Guidance on counting storeys and measuring height and examples in relation to each are given in the Guidance to assist with this process.

(2) Building work in relation to existing HRBs

With reference (2), the Guidance sets out the criteria for a building to be considered an HRB during building work to an existing HRB, to an existing building which will make it an HRB (for example adding storeys) or to a building undergoing a change of use which brings it within scope. To understand whether a building is within scope a similar analysis to that in (1) must be undertaken, noting that building work to an existing building may bring it within scope.

(3) The occupation phase in the higher-risk regime

The guidance sets out criteria for a building to be an HRB in the occupation phase of the higher-risk regime. HRBs for the in-occupation requirements under Part 4 of BSA are defined in section 65 of the BSA and in the Regulations. The obligations in Part 4 of the BSA largely apply to occupied buildings, therefore this is referred to as the "in occupation" part of the regime. For the "in occupation" part of the regime, HRBs are defined as buildings with at least two residential units, which are at least 18 metres in height or have at least 7 storeys. In contrast to the regimes in (1) and (2), exclusions during the in-occupation phase include where the entire building is used as a hospital or a care home.

Background

The Building Safety Act 2022 (BSA) received Royal Assent on 28 April 2022, with many of its provisions coming into force on 28 June 2022. The remaining provisions are coming into force by way of staggered implementation, with detail as to how the regime will work provided by further regulation. Our recent update examining aspects of this new legislation can be found here, and provides further background and detail on the regime in general and certain points discussed in this article .

According to the explanatory notes to the BSA, its objectives are "to learn the lessons from the Grenfell Tower fire and strengthen the whole regulatory system for building safety". The BSA contains 6 parts and 11 schedules aimed at addressing a range of issues relating to building safety and standards. The regime is so far untested in lending transactions therefore no clear way has yet emerged as to how to best approach the issues in the context of finance documents.

We anticipate its impact will be felt in a number of different types of financings including financings of construction projects for new buildings, financings for acquisitions of buildings which are in scope and refinancing of existing buildings/building portfolios which are subject to the regime.

What are the main aspects of the BSA?

The key themes that are being promoted in the new regime and that may be relevant to lending transactions were discussed in Taylor Wessing's article referred to above and include:

The establishment of a new national industry body responsible for managing and implementing the new regime and with duties and rights of enforcement in relation to review of building safety standards, namely the Building Safety Regulator (BSR).
A regulatory focus on HRBs, which includes the following aspects:
(i) a 3 gateways approvals process, applicable to (1) planning; (2) pre-construction and (3) pre-occupation of HRBs (the Gateways Approval Process)
(ii) requirements to maintain a "Golden Thread" of information, which is essentially a digital record of relevant documentation to support fire safety (the Golden Thread).
A series of new statutory duties for parties involved in the design and construction of all buildings, to ensure that such buildings meet building regulations, but incorporating more stringent duties for HRBs.
New duty to assess and manage occupied HRBs with a focus on ensuring the safety of such buildings.
Significant extensions to limitation periods applicable to building safety defects and other claims in relation to building safety, applicable to both retrospective and prospective claims.

The Gateways Approval Process and the Golden Thread are considered below, with a focus on their potential impact on lending transactions, noting that other aspects of the regime, while likely to have an impact on lending transactions, are not considered here.

The Gateways Approval Process

The new "Gateway regime" incorporates three stages, which require the seeking of approval from the BSR at decision-making points during the process of construction/significant refurbishment to HRBs, although it should be noted that at planning stage the BSR, which sits within the Health and Safety Executive, is a statutory consultee, rather than the decision-maker.

Gateway 1 – Planning Stage: applicants will need to demonstrate that fire safety matters have been taken into account, which may be demonstrated by submission of a fire safety form;
Gateway 2 – Pre-construction/refurbishment: construction/refurbishment may not begin unless the BSR has approved the application;
Gateway 3– Pre-occupation: occupation is not permitted until the BSR has carried out final inspections, is satisfied that the building complies with the BSA and issued a completion certificate (the Completion Certificate).

The secondary legislation implementing the Gateway 2 and 3 building control process sets out time frames for the BSR to provide its response: 12 weeks for new builds, 2 weeks for refurbishments at Gateway 2; and 3 weeks at Gateway 3. BSR approval will also be required for any "major change" during the construction, with a further period of 6 weeks reserved for the BSR response. This elongation of the timetable in relation to a construction/refurbishment project will need to be factored into the construction/refurbishment process and financing and repayment timetables.

In addition, the interface between the issue of a Completion Certificate from the BSR and "Practical Completion" will need to be addressed. The Completion Certificate is a key document – without it, the HRB cannot be physically occupied without being registered and registration can only take place once the Completion Certificate from the BSR has been issued. Any significant delay to "Practical Completion" and failure to meet the "Required Completion Date" is also likely to be an event of default under the relevant facility therefore there will need to be an agreed position on how to address delays caused by the implementation of the Gateway regime in this context.

The Golden Thread

The Golden Thread aims to serve as a comprehensive digital record of all relevant information throughout a building's lifespan, from design and construction to maintenance and completion. The Golden Thread will be relevant to existing and new HRBs. It is a hallmark of the new regime, which aims to ensure transparency and accountability is achieved at each stage of a building's lifespan.
The BSR will monitor compliance with the obligations to maintain such information at Gateways 2 and 3. The documentation required will include full plans, a fire statement, construction control plan through to a "safety case" and a resident engagement strategy during the occupation stage. Confirmation of delivery of "specified golden thread" information at completion of a new HRB to the relevant Accountable Person (AP) ie the person with responsibility for building safety, will be a key requirement to the issue of the Completion Certificate.
Addressing issues in relation to building safety to date has sometimes been hampered by there being a shortage of historic information in relation to construction and throughout a building's life cycle. The fact this information will now be available in an easily accessible format should assist lenders by providing:
(i) a clear route to enable assessment of the building's "past" ie track record on its design, construction and any major changes made to the building during construction
(ii) clarity on whether the borrower/development parties have complied with the BSA at each stage of a new development
(iii) an opportunity to investigate whether the conditions for occupation have been met prior to the final maturity date of a development facility.

Given the importance to the lender of thorough due diligence over the property and the planned development, and the importance placed on monitoring the development of the property, access to a greater suite of documentation may be considered very welcome. The borrower will be required to comply with the BSA through the "compliance with laws" undertaking, but the lender will want to be in a position to understand if the regime is being complied with throughout the term of any loan affected by the regime, and will be able to use information undertakings, conditions precedent and other protections within the loan agreement to do so. Access to further tranches of the facility within a development financing could be made to be conditional on the satisfaction of provision of the required information at each stage. In addition, from a reputational perspective, a lender would not wish to be seen to be funding a new build development where it is not in compliance with the new regime.

Key conclusions

It is not yet clear what impact the BSA will have on finance documents, and it is noted that certain provisions of the BSA are yet to come fully into force. We anticipate the impact is likely to be felt in two main ways:

Timing: the new regime introduces provisions that may delay progress on developments in a number of ways including the length of time required for the BSR to respond and for a building to progress through Gateways 2 and 3. This is likely to impact on the timetable for any related financing and the drafting of the facilities agreement in relation to "Practical Completion" and failure to meet the required date for completion.
Access to information: Lenders will have a clear route to assess the building's "past" and greater clarity on whether the borrower/development parties have complied with the BSA at each stage of a development. It is likely that lenders will look to build in measures to ensure they can understand if the regime is being complied with throughout the term of a development loan, and will be able use information undertakings, conditions precedent and other protections within the loan agreement to do so.