The Building Safety Act 2022 (BSA) was enacted on 28 April 2022 with many of its provisions only going into effect on 28 June 2022. According to the explanatory notes to the BSA, its objectives are “To learn lessons from the Grenfell Tower fire and to strengthen the entire regulatory system for building safety.” The law contains 6 parts and 11 timelines that aim to address a range of issues related to building safety and standards.
The majority of BSA’s are outside the scope of this article and our experience with insolvency, however, and are buried in Part 5 of the BSA, Section 125 titled “Meeting the Insolvent Owner’s Treatment Costs.”
Sections 116-125 of the Code are referred to as “Tenant Protection” because they protect tenants in multi-occupation apartment buildings from some of the costs associated with addressing historic building integrity deficiencies.
The BSA Explanatory Notes explain the background in more detail which, given the complexity of the issues, is worth going into:
They explain that most multi-occupation apartment buildings in England, such as blocks of flats, are freeholder-owned, with individual flats being held on long leases (21 years+). A freeholder usually owns the land on which the building is built, as well as the structure and common parts of the building (such as stairways and hallways). However, the ownership structures of multi-occupancy apartment buildings can be complex with many additional owners owning the building or parts of it, separate from the freeholder of the land on which the building is located. BSA also tries to cater to these complex scenarios with the ultimate goal that the tenant does not end up bearing the cost of the business.
It is the responsibility of the freeholder to ensure the safety of the building and to maintain the structure and common parts. The costs associated with these responsibilities can usually be charged to the tenants through a service fee, depending on the terms of the lease. The service fee usually covers the costs associated with routine maintenance and repairs. However, there was concern among lawmakers that the costs of remedial works relating to, for example, defective cladding sometimes amounting to £100,000, would be passed on to tenants by service charge contributions or by landlords depleted of reserve funds.
Tenant protection provisions aim to hold those “considered directly responsible for creating defects in the integrity of buildings”, whom the BSA considers to be landlords, landlords, developers and their partners, liable through the courts and prohibit costs being passed on to tenants.
With this background in mind, it is worth exploring the entirety of the formulation to examine its potential impact. Article 125 states the following:
(1) This section applies if, in the context of Email us for the company that is owner under Related building rent or any part thereof, it appears – (a) to exist related defects relating to the building, and (b) that the Company is obligated (however imposed) to remedy any relevant defects or is responsible for reimbursement of any costs incurred or to be incurred in remedying any related defects.
(2) The court may: On the application of a person acting as an insolvency practitioner in relation to the companyby order requiring a corporate body or partnership linked With the Company – (a) to make such contributions to the assets of the Company as the Court may deem just and equitable, or (b) to make such payments to such specified person as the Court deems just and equitable for the purpose of meeting the costs incurred or to be incurred in remedying the relevant defects mentioned in Subsection (1) (b).
Section 124(4) applies for the purposes of this section
(3) An order may be made where the winding up procedures of the company have commenced before (as well as after) the entry into force of this section.
(iv) in this section – “acting as an insolvency practitioner” has the meaning given to it in Section 388 of the Insolvency Act 1986; “related”: see Section 121; “Court” means the court having jurisdiction to dissolve the company; “Partnership” has the meaning given to it in Section 121; “Relevant building”: see section 117; ‘Relevant defect’: see Section 120; “specified” means specified in the application.
Our extra focus.
First, a “related building” is defined here in Section 117 as a free-standing (structurally separate) building with at least two dwellings, at least 11 meters high or 5 stories high. In other words, what the average person would consider a high-rise building of apartments.
There must also be a ‘qualifying lease’ in relation to this premises. This means a long term lease (21 years +), a lease with service charge obligation, a lease granted prior to 14th February 2022 and the apartment is the tenant’s main home (or the tenant owns no more than two other properties in the UK).
The definition of a “relevant defect” is somewhat complex, but essentially means any works on the building in the 30 years prior to the entry into force of the Sea Surface Act that may present a safety hazard (fire hazard, collapse hazard, etc.).
There is a lot to unpack in Section 125 and it raises a lot of questions and doubts about how it works and how to apply it in practice. Essentially, however, the effect of Section 125 appears to be to enable the court, at the request of the office-holder, to hold someone else, other than (but related to) the owner of the business, liable to pay for the repair work. When the owner becomes insolvent and is no longer able to pay them. All on the background that the tenant does not have to pay.
The first question in analyzing Section 125 in our minds is which court has jurisdiction? The “court” here, under Article 125(4), is the court having jurisdiction to dissolve the company. If we apply Section 117 of the Insolvency Act 1986 (IA86), this is the Supreme Court and, therefore, that should mean the list of business, property, insolvency and corporate courts. While section 117 IA86 also grants jurisdiction at county court level, it is unlikely that company property owners with issued share capital of less than £120,000 would fall under BSA jurisdiction anyway.
The second question is – who is the person “acting as an insolvency practitioner”, i.e. who has the capacity (place) to make an application? The answer would seem obvious – on the face of it, section 125 appears to apply only to liquidations, i.e. liquidations, and therefore, only liquidators can apply – see Section 125(1).
However, section 125(2) indicates that the application can be made by a person “acting as an insolvency practitioner”. This term is then defined in Section 125(4) by reference to the definition of this term in Section 388 IA86. Section 388 defines a person “acting as an insolvency practitioner in relation to a company” to include not only liquidators but also interim liquidators, administrators, administrative receivers, controllers, and nominees or supervisors under the CVA. So there may be an argument that an anomaly has crept into Section 125 and that it applies far beyond mere liquidation but to a much broader class of insolvency and office-holders.
Our next question is – given the discretionary nature in which Section 125(2) is framed (the “court may” make an order) and the burden on the officer in charge to file an application voluntarily is: Why would the liquidator do that? In other words, what good is it to the estate and to the creditors in the liquidator that they have incurred considerable time and expense in doing so?
The answer that seems to us lies in the two different types of arrangement that can be offered. The court can order that another company or partnership “related” to the owner either (a) make a “fair and equitable” contribution to the assets of the insolvent company or (b) make a payment to a person named in the court order for the purpose of covering business costs.
An appeal requested by the liquidator, specifically, to an order Just Under Section 125(2)(a) it appears to us to be an inducement. This specifically states that payment is made by contributing to the company’s assets. By applying the insolvency law, the recoveries will enter into the general pool for the benefit of all creditors. Then, it should be distributed according to the usual rules on priority, which means that the fees and expenses of the liquidators are paid first, then the preferential creditors and so on. Depending on the level of liabilities in liquidation, it is practicable that the money under Section 125(2)(a) the matter would be swallowed whole by the company’s other creditors and would not go toward the costs of the repair work. This certainly cannot be what BSA intended.
It appears that an order under Section 125(2)(b) ordering payment to a “designated” person, that is, a person specified in the court order, can address this issue. On one reading it would mean paying a construction company/developer who specialize in repair work but the wording is arguably broad enough to cover anyone including liquidators themselves. Then arises a more complex legal issue similar to a sort of Quistclose Trust argument, where payment is made for a specific purpose coverage Business costs should only be used for this purpose. It is clear that the payment in these terms of trust to the holder of the office falls outside the general pool due to the creditors and the normal priority rules under the insolvency law. While this appears to achieve the purpose of the BSA, it does not benefit the company’s creditors and begs the question why any liquidator would make such an application and who would fund it? Indeed, it can be argued that any liquidator who does so will not comply with his duties to the body of creditors as a whole if there is no tangible benefit to them but the cost of the application is borne by the estate.
Another question left unanswered is how will the courts interpret the word “fair and equitable” to estimate the contribution or payment required? This is entirely left to the court’s discretion, and while it is not a foreign concept to ICC judges, there is no indication in the Criminal Procedure Code to assist the court in exercising its discretion and there is no case-law to guide them yet. A fair amount may be said to include full reimbursement of the costs of the remedial business or only a small contribution to it. The former justifies the application costs; the latter no.
It is also surprisingly likely that the respondent to any application is likely to object vehemently to an application, exposing the office holder, presumably, to the risk of costs if that application fails. Again, why should the company’s creditors, who ultimately bear the brunt of these costs, if they occur as liquidation expenses, if there is no prospect of their benefit in making the application in the first place?
The scope of Section 125 cannot be overemphasized. Section 125(3) makes it clear that it has both retrospective and prospective effect. Thus, related insolvent owner companies that went into liquidation before June 28, 2022 are also vulnerable to being affected.
Finally, the definition of “fellows” under Section 121 is very broad, much broader than the definition in Section 435 IA86 would be used for practitioners, and therefore has the potential to attract a very large pool of potential respondents to any Section 125 application. While it offers opportunities to recover to an otherwise barren liquidation, it also presents a lot of complexity and risk.
It remains to be seen how significant the impact Section 125 will have, but as we stare into the barrel of another prolonged recession, there is a high chance that real estate and construction will be negatively affected and many landlord companies could go into bankruptcy. Office owners may then need to deal with the intricacies of BSA.