Blog - 30/04/2021
Cladding update: Government funding – be aware of loan requirements for buildings over 18m high
Many residential blocks of flats over 18m in height are now being granted government funding by the Government Building Safety Fund (BSF) to replace cladding identified as containing combustible materials. The Government has pledged a further £3.5 billion in addition to the £1.6 billion allocated last year. The application deadline has been extended to 30 June 2021, but only for blocks that have registered with the BSF. The works are required to commence by 30 September 2021.
Additionally a new loan scheme has been introduced to fund remediation of external walls in blocks that are less than 18m high. Those loans are to be made on the basis that leaseholders never have to pay more than £50 per month in loan repayments.
If you are considering applying to the BSF fund, we have seen that the funding for blocks over 18m high is being provided by means of a grant funding document (the Grant Funding Agreement) containing many of the terms and conditions which one would see with a loan, albeit without (except in one circumstance) any repayment obligations.
Before making the application for funding it is important to be aware of the conditions which may apply. The steps that should be taken by anyone looking to take the funding cover the following main areas:
- Independent legal advice has to be obtained on the Grant Funding Agreement, which is essentially a quasi-loan document and many of the terms and conditions should be properly understood and acted on. This includes that all required consents and permissions for the carrying out of the works to remove the dangerous cladding must be in place;
- A building contract for the remedial works has to be provided;
- All reasonable endeavours must be undertaken to pursue reasonable remedies against insurers, contractors, manufacturers and warranty providers.
More details on all three areas appear below.
- Advice on Grant Funding Agreement
The Grant Funding Agreement may contain many of the provisions usually contained in loan agreements. It is important to be aware of some of the key provisions and take advice before submitting the application for funding, not least as one of the conditions is that the applicant obtains independent legal advice. The conditions to be satisfied to secure funding can include:
- Although a person can apply for funding if they do not have an interest in the property because they have been appointed to manage the building, the written consent of the owner must be obtained;
- All consents have to be obtained;
- There is no litigation which may have a material adverse effect on the ability of the applicant, due to the impact on its financial position or otherwise, to carry out the works;
- The applicant has full legal control of the building and/or has all required consents or permissions from the owner;
- The site is free from conditions, restrictions and covenants which may affect the ability to carry out the works and achieve practical completion;
- The applicant must ensure that all contractors are suitable and competent in all respects;
- The applicant will not receive any economic advantage from running the project;
- The funding must be treated as a payment in lieu of service charge payments and any advance payments made by lessees should be returned to them.
There is also a clause of which all applicants must be aware, that in the case of an event of default (which will be many and set out in some detail in the Grant Funding Agreement and which include in particular breach of obligation or failure to carry out the works in accordance with the relevant consents) the Government can suspend further payments and potentially can also reclaim sums already paid or even cancel the funding. Therefore very strict compliance with all terms of the Funding Agreement is of paramount importance.
- Building contract
There are certain ‘minimum’ requirements to which the building contract for the remedial works must adhere including, but not limited to:
- the provision of collateral warranties;
- a defects rectification period of at least twelve months;
- a retention of at least 5% of the overall works value;
- a requirement that the contractor must maintain professional indemnity insurance which is both adequate and does not exclude cover for cladding; and
- provision of documentary evidence to support cost claims.
There is also a specific requirement for the appointment of a named cost consultant or quantity surveyor where the costs of the remedial works exceed a certain threshold.
- Reasonable endeavours to pursue reasonable remedies available
This begs the question, ‘who can be pursued if there is unsafe cladding in a block?’ Well, the answer is that there are likely to have been several parties involved in the original design and construction who could have potential liability for defective cladding and for that matter other fire stopping defects as well.
It remains to be seen whether for the purposes of the conditions of a Grant Funding Agreement it is sufficient to proceed with a claim against any warranty provider and proceed with their internal dispute resolution processes or whether the obligation goes further.
Otherwise, the options available include:
- Under the Defective Premises Act 1972, any person undertaking works in connection with the provision of a dwelling is under a statutory obligation to ensure that the works they undertake are completed to a standard which allows the premises to be fit for human habitation. Therefore, where there are cladding or any other fire safety issues in a building, the original developers, as well as anyone involved in its design and construction, could be liable for breach of statutory duty. A claim under this head may well be brought against the architects, contractors, project managers and developers involved in building the block and any other party involved in the works.
- New build insurance warranty providers usually offer a 10 year guarantee on new build properties. Depending on the wording of any such policy, these insurers could potentially be pursued where there are unsafe cladding and other fire stopping issues in a building. The prospects of success of claims under this head are dependent on policy wording, and many policies limit the insurer’s liability in respect of cladding outside of the first 20 years. Some of the biggest players in this market include NHBC, LABC and BLP. Many new build warranties now specifically exclude cover for fire safety defects.
- Breach of contract. Usually a developer of a new build block will make certain assurances to the purchaser in the sale contract that the building will be built to a good and workmanlike standard and with good quality materials. Where there are cladding issues in a building, the developer is quite likely to be in breach of the terms of the contract if such defects exist.
There are also growing concerns that many other defects (including other fire safety defects) in residential flats are coming to light, mainly due to inadequate supervision and regulation, for which there is currently no Government assistance.
As ever, these issues are complex and will often be fact and document specific. We therefore recommend that anyone who is investigating remediating cladding and fire safety defects at their block should engage appropriate advisors at the earliest opportunity to ensure that any potential pitfalls can be avoided and in particular to ensure that limitation issues do not arise.
We have previously written about cladding issues here and here.
Stephen Brower in our Property team has extensive experience in loan documentation.
Brenna Baye in our Construction team is advising on building contracts which satisfy the loan requirements.
Joanna Osborne of the Property Litigation team has extensive experience in dealing with building defect claims.
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Please note that this blog is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content of this blog.
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