By Professor Susan Bright
This note: 1. Sets out the context of the government’s ‘new’ approach; 2. Explains the proposed ‘Polluter Pays’ Amendment with a particular focus on the current crisis; and 3. Sets out an alternative.
A couple of weeks ago Michael Gove announced a new approach to tackling the fire safety crisis (10.01.22).
Levelling Up Secretary resets government action on building safety in England Leaseholders living in their own flats will not face any costs to fix dangerous cladding, with developers and cladding companies paying instead Industry given two months to agree to a plan of action to fund remediation costs, currently estimated at £4 billion New measures to hold firms to account and restore common sense to the market The government has today (10 January 2022) reset its approach to building safety with a bold new plan to protect leaseholders and make wealthy developers and companies pay to fix the cladding crisis.
His speech (and actions) are encouragingly tough on those who have built unsafe residential blocks and shows a determination to fix the cladding scandal. It can, perhaps, be summarized as a ‘polluter pays’ approach; and an early analysis was provided by Inside Housing here.
Full details of what we can expect from Michael Gove’s building safety speech
It is clearly right, or ‘just’, that the polluter should pay, and that the innocent purchasers should be saved from costs. Of course, the ‘polluter’ extends beyond those in the construction industry as we are likely to discover in the upcoming module of the Grenfell Tower Inquiry which will explore the role of successive governments. For this post the focus is, however, on those involved in the construction industry.
There are different routes that could be adopted to make the polluter pay.
Gove’s is a version of the ‘carrot and stick’ approach, wielding government power to incentivize the ‘right’ behaviour – those who have put on the unsafe ‘cladding’ should fix the problem otherwise they will be denied access to, for example, government funding, or, alternatively, be pursued through the courts (it is unclear how). A much weaker form of this has been previously tried but had very limited impact. Gove also states that “no leaseholder living in a building above 11 metres will ever face the costs for fixing dangerous cladding”. There is much more besides: the controversial Consolidated Advice note has been replaced, developers will be urged at meetings to fix 11m+ buildings that they built (see Telegraph report here), the Building Safety Fund for non-ACM cladding will be re-opened, there will be a government scheme to indemnify building assessors carrying out EWS assessments.
Michael Gove has threatened to block major housing developers from securing planning permission if they fail to come up with a £4bn compensation scheme for victims of the cladding crisis. In a call with industry executives, the Levelling Up Secretary said that companies must recompense hundreds of thousands of people living in buildings between 11 metres and 18 metres in height or face severe action.
Since then he has written to cladding and insulation manufacturers seeking contributions. Collectively, this is a tremendous and very important development.
However, as Inside Housing points out, even if this approach works there will still be significant gaps. The position in relation to non-cladding defects remains unclear (yet often they form the lion’s share of remediation costs), and it’s unclear what happens if the developer is no longer around (perhaps this will come from the £4billion being talked about from, perhaps, a more collective ‘voluntary levy’ from the construction industry). A government task force, Operation Apex, will track down those responsible and use the leverage government has to pursue them.
It is likely that even with this new approach many buildings will still be stuck.
What should be the leading principles? First, and crucially, speedy and proportionate remediation. Secondly, the polluter should pay.
How might a polluter’s pay approach work?
A campaigning group have put forward an amendment to the Building Safety Bill which is known as ‘Polluter Pays’ (available here: https://buildingsafetycrisis.org/polluterpays/introduction/). The overall goal of the scheme is to ensure that residential blocks with fire hazards are made safe speedily, efficiently, effectively and proportionately, without recourse to litigation, and without cost to leaseholders.
Polluter pays is intuitively a ‘just’ approach. It aims to reunite fault and remediation. Were it to achieve that it would relieve those finding themselves unwittingly facing costs – leaseholders and (some) freeholders – and limit recourse to public funds. These are noble goals. It also avoids the need to issue High Court proceedings (few of which have happened due to the complexities and (lack of) speed of litigation, costs, limitation problems, and risks). Going forward, this idea would, if effective, form a good approach to encourage high standards of construction as part of the Building Safety Bill reforms.
In relation to the current crisis, however, there are serious concerns raised about whether the scheme it seems the government is inclined to introduce, the Fire Hazard Remediation Scheme (FHRS), will get the job done. In sum, my concern is that it is limited in scope as it applies to some (but not all) affected buildings, will delay remediation as polluters embrace a process they can game, and for many buildings there will still be no way forward. The appealing rhetoric may create a mirage of ‘job done’, behind which the government can hide and it will take pressure off the government to come up with a scheme that will move at pace and be comprehensive.
It is looking as though the Government will introduce some kind of PP amendment at the House of Lords stage of the Building Safety Bill so now is the time to ensure it is as strong as it could be. This note discusses the wording currently available from those who have worked hard on this over recent months.
- Thoughts on proposed FHRS (Polluter Pays) (available here: https://buildingsafetycrisis.org/polluterpays/introduction/).
FHRS is an administrative scheme to determine if buildings were compliant with building regulations at the time of construction. If not compliant, the developer (or parent company) will have to pay for remediation and other interim costs. If the developer/parent cannot pay, the costs will be covered by a levy raised on the construction industry. In this it aims to avoid the need for leaseholders to undertake the expense and risks of High Court litigation. The objective of placing liability on those who caused the problems is sound.
- Overall: it will not be ‘the’ solution, but an FHRS approach might form a part of the government armoury.
1. As the scheme requires breach of building regulations to be established prior to the award being paid, this will delay remediation: a) due to the need to establish an administrative scheme with appropriate procedures, and the nature of the assessment that will need to be done case by case; b) due to the risk of planned remediation being put on hold by polluters until a determination establishes liability; c) administrative decisions are likely to see a significant number of legal challenges. @nearlylegal explains in a twitter thread https://twitter.com/nearlylegal/status/1484646881414324233 why the scheme will be difficult to implement, and why he thinks that PP is not ‘the’ solution. Opportunities for delay advantages polluters, who can be expected to fully exploit them.
2. Gaps: FHRS does not provide for situations in which there was no breach of building regulations at the time of construction, which will include buildings below the more strongly regulated heights. There is significant debate as to whether all fire safety defects were in breach of building regulations, and much room for argument.
Establishing breach of building regulations will often be complex, and experts will give conflicting evidence. Dr Jonathan Evans explains some of the problems in this twitter thread: https://twitter.com/Jonatha135113/status/1484670352307458049.
A key provision is Regulation 8 (also section 1 of the Building Act 1984) that states that the goal of building regulations requirements is to secure ‘reasonable standards of health and safety for persons in or about buildings (and any others who may be affected by buildings, or matters connected with buildings)’. This is not concerned with the integrity of the building itself.
Although there is mention of a ‘rebuttable presumption’ in the FHRS each building must be assessed holistically and therefore ‘polluters’ will seek to rebut any presumption. It is unclear what mechanism will be in place to enable rebuttal. It is likely that expert evidence will be used and a ‘battle of the experts’ will take place. It should not be assumed that administrative processes are without contention. In practice, establishing fault is therefore likely to be protracted.
One suggestion is that assessors should also be given power to require the polluters to produce internal documents pre and post construction (cf disclosure) to keep them honest and reduce game playing.
The FHRS provides for the appointment of assessors. Their task is to make a ‘determination’ as to i) whether a block comes within the scheme, ii) whether it is eligible for a grant, and iii) who should be paying. Each of these issues will involve complex factual questions, and determining responsibility within complex construction matrixes.
The determination of the assessor as to whether a building falls within a scheme (points i) and ii)) is final – but it can be judicially reviewed (as FHRS assessors will be exercising a public function).
It will also require the appointment of a number of suitably experienced and qualified – and independent – assessors . There is already a shortage of assessors. @nearlylegal discusses these, and related, concerns in his twitter thread mentioned above.
A developer or builder required to pay an award can appeal to the First-tier Tribunal (and @nearlylegal anticipates that ‘every award will be appealed’ because ‘the developer’s costs of taking a punt on appeal are minimal next to the size of the award’), and will be able to apply to a court/tribunal for someone who shares responsibility for the defects to make a contribution.
It is unclear how the amount of the award will be determined. The FHRS amendment may enable an award to cover not only remediation costs but also to indemnify for mitigating measures etc, but the details will be in Supplementary Regulations so it is not possible to comment on this yet.
In relation to securing remediation there will be several features that need to be addressed, which may well already have been given consideration but which are not yet published:
- Who is it paid to?
- How can it be ensured the money is spent on remediation?
- Will the payee have the right to enter and change the building?
- Amount: Can this be assessed prior to tender? Will assessors have the necessary skills?
- What will be the standard of remediation? (eg In EWS terms: B1, or A1?)
- How will it be ensured that the assessor’s decision will be adequate for bank valuers to approve a loan?
- Joint and several liability: the assessor can require an award to be made by one or more persons, on a joint and several liability basis. This is likely to be very controversial, especially as the statements made about PP emphasise that awards can attach to parent companies etc. Of course, these related companies may not be ‘culpable’, and it is unclear how this approach will apply if there have been company acquisitions post construction.
Many details of the scheme are currently left to supplementary regulations. These will contain important details that will impact its scope, etc. It is concerning that so many crucial issues are to be dealt with under delegated powers. Will these by negative or affirmative resolution?
Extending liability to associated/parent companies
This runs against basic principles of company law, and will be challenged under human rights legislation. Where foreign domiciled companies are involved, enforcement will be particularly difficult and Investment Treaties will need to be examined to ensure HMG is not in breach of them .
The current timetable referred to is ambitious (first grants paid within one year of Royal Assent). The proposed FHRS needs implementing which will require an implementing Regulation introduced after consultation, recruitment of personnel, establishing an office, setting up of robust administrative procedures etc before assessors can start. All that is likely to take up the first year before assessments start. Assessments will take time to be final and binding. Some ‘polluters’ may be persuaded to get on with the job now, knowing that this is coming down the line and carries the risk of them covering mitigation measures,. But many will be tempted to defer payment, as they are currently doing, and challenge awards. Time is not on the side of leaseholders who need remediation now.
Incentivising prompt action
There will probably be some cases where the FHRS will work and produce speedy results for leaseholders. What about the situations in which the builders and developers are minded to delay and contest? Apart from the fact that the Regulations hint that the award ‘may’ include mitigation measures, the current proposal has no incentives to push the polluter to get fixing things now, rather than waiting for an assessment. To incentivize prompt action the assessors should be given powers to:
- Award leaseholders the costs of the assessment process against the polluter (that is, if polluter delay has caused leaseholders costs cf legal costs in court cases)
- Award leaseholders an amount in recognition of the delay in remediation (the idea of ‘distress, inconvenience etc’, cf Rendlesham Estates and Barr, a DPA case; costs of interim mitigation measures, higher insurance costs etc)
- Recommend to the SoS DLUHC that the polluter be excluded from Help to Buy/projects using Homes England money until the polluter has provided evidence of a satisfactory building safety compliance programme that has been adopted and implemented covering it and its sub-contractors work
- and for the SoS to have an obligation to maintain and publish a rolling 5 year list of polluters who have had assessments made against them
- An alternative/additional model to deal with the immediate crisis: Polluter Pays through government enforcement
The alternative model I put forward here will be unattractive to government – it requires more public funding up front – but it is the only way to make progress now that covers all buildings with defects, rather than applying to a subset with proven construction defects. So the steps would be:
- The government forward funds remediation, and sets up a method to ensure remediation happens
- Funding will be secured by:
a) current ‘voluntary approach’: contributions + pressure on developers to remediate their buildings AND
b) the government recovers from polluters through litigation including subrogation of leaseholders rights to sue. In a sense the government would act as a litigation funder but would be retaining all money recovered AND
c) introducing a balancing industry tax (based on the idea of there being collective responsibility of the industries that have polluted). Inevitably this will also catch non-polluters, but action is needed.
On b) the causes of action will be assigned to government when funding is provided to a building for remediation. This will enable the government to build a portfolio to leverage. Causes of action will include:
- the Defective Premises Act 1972 (with the proposed extended limitation period of 30 years);
- contractual claims (this may be a rather restricted group based on off-plan leasehold purchasers, but freeholders may also have claims, including under collateral warranties);
- s38 Building Act 1984 which is being brought into force with a 30 year limitation period. This needs to apply retrospectively and allow recovery for economic loss (not just ‘damage’) (in several respects similar to the idea behind PP, but without the administrative scheme).
Advantages over current PP Amendment
Ensures speedy remediation
Central task force develops technical and legal expertise to pursue these cases – more likely to have positive outcomes to ensure polluter pays
This gets the job done and honours the polluter pays principle without the contention between polluter and leaseholders which would otherwise cause delay.
Recourse to public funds is limited.
It also puts the government front and centre of resolution of this now longstanding problem. A problem that was in no small part a result of deregulation of the building inspection system without appropriate checks and a Nelsonian approach to building safety standards and practice.