The courts approach to enforcing building liability orders

Answer

The Building Safety Act 2022 (the BSA 2022) is a key piece of legislation introduced following the Grenfell Tower fire, receiving royal assent on 28 April 2022. Its aim is to ensure rigorous building safety regulations and an assumption of greater accountability for those liable in respect of building defects. Building liability orders were introduced under section 130 of the BSA 2022 to address the use of corporate structures to evade liability for building defects. The Technology and Construction Court (TCC) have recently issued their first such order in 381 Southwark Park Road RTM Co Ltd and others v Click St Andrews Ltd and another [2024] EWHC 3569 (TCC), and its implications for associated companies are discussed.

The issue of developer SPVs

A special purpose vehicle (SPV) is a legal entity that may be created for a limited purpose, such as owning and managing an individual development. SPVs in the context of building developments typically have very few assets and may be wound up once the development is complete. As a consequence, group companies have no long-term civil liability in respect of the development. Building liability orders seek to address this issue.

Building liability orders as defined under the BSA 2022

Under section 130 of the BSA 2022, building liability orders are an order made by the high court providing that any “relevant liability” of a body corporate can also be a liability of another specified body corporate (for example a parent company) or a joint and several liability of two or more specified bodies corporates. The courts will only make this order if it’s “just and equitable” to do so:

• A “relevant liability” is defined as a liability incurred under the Defective Premises Act 1972 or section 38 of the Building Act 1984 (this provision is not yet in force) or as a result of a building safety risk (related to the spread of fire or structure failure).
• Section 131 of the BSA 2022 defines when a body corporate is associated. This includes where one of them controls the other or a third body corporate controls both of them (for example a parent company or another company which shares the same parent company).
• Until the case of 381 Southwark Park Road RTM Co Ltd, there was no guidance under section 130 of the BSA 2022 as to what “just and equitable” entailed. Debates in the House of Lords suggested that the nature of the defects, the extent of the damages sought and whether a fair trial can take place were all factors that could be taken into account.

The case of 381 Southwark Park Road RTM Co Ltd and others v Click St Andrews Ltd and another [2024] EWHC 3569 (TCC)

The claimants were the leaseholders of a block of flats with defects. In previous proceedings, the defendant, Click St Andrews Ltd, was found to be liable for a building safety risk, namely water ingress to the building. However, Click St Andrews Ltd was an SPV, now in liquidation, so the claimants sought a building liability order from the parent company, Click Group Holdings.

The judge found that the first two limbs of the test under section 130 were satisfied – the “relevant liability” had been established in the prior case and the claimant had no trouble with proving that Click Group Holdings was an associated company of Click St Andrews Ltd. The key issue here was whether it was “just and equitable” to make a building liability order in respect of Click Group Holdings.

The courts interpreted the wording “just and equitable” in the context of the purpose of the BSA 2022, which as described previously was to remedy the use of SPVs by associated companies to evade liability for building defects. In the case of Triathlon Homes LLP v Stratford Village Development Partnership [2024] UKFTT 26 (PC), “just and equitable” was considered in the context of the BSA 2022 in relation to remediation contribution orders. These are separate orders granted by the courts against landlords, developers or other associated entities to pay for the costs of remediating certain building defects. In this case, the first tier tribunal explained that the purpose of including “association” provisions in these orders was to extend liability beyond the SPV company to parent companies or other wealthy entities related to it in order for the cost of remedying the defect to be met. 

In 381 Southwark Park Road RTM Co Ltd, Click St Andrews was an SPV company reliant on intercompany/inter-group loans. The judge stated there were “considerable doubts as to the financial standing of Click Group Holdings”. However, the judge held it was nevertheless “just and equitable” to make a building liability order in respect of Click Group Holdings. It was the financial standing of the company with the relevant liability, Click St Andrews, that was important, and not that of the parent company when considering what’s “just and equitable”. In addition, the judge held that the indicators in favour of making the order were that Click Group Holdings was the holding company of Click St Andrews, albeit one step removed, and the companies had a common “directing mind”. The test under section 130 was therefore satisfied, and the courts granted the first building liability order against Click Group Holdings Limited since the BSA 2022 was enacted. The consequence of this is that the relevant liability of Click St Andrews is also the liability of its parent company Click Group Holdings.

Summary

The introduction of building liability orders under section 130 of the BSA 2022 enables the high court to pierce the corporate veil of group structures in circumstances where it considers it “just and equitable” to do so. This decision provides useful guidance on how the high court will exercise this power.  Further judicial consideration of what may be considered “just and equitable”, albeit it the context of remediation contribution orders, may be forthcoming from the appeal of the triathlon decision to the court of appeal.  

Monda Ajazi is a trainee solicitor at Shoosmiths.