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03 Oct 2023

Building Safety Act 2022 – twelve things to check when buying a mixed use building

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The scenario

You're an investor looking to buy a mixed use property. The property is a large high street block in London, built in the early 2000's. The block has retail on the ground floor, then two floors of offices and finally two small flats at the top. The flats have been sold off on 999 year leases and don't generate any income, so you're not really interested in them. But you've heard that, because of the flats, you might have obligations under the Building Safety Act ("BSA"). Is that right and what are the key things that you need to be aware of?

The BSA

It is right. Whenever you have residential units you need to consider whether the BSA applies.

The top twelve things to check are:

1. How many residential units are there?

If you have two or more residential units in any building then you need to consider carefully whether the BSA applies. There are lots of limitations, but if you think the BSA doesn't apply, make sure you know why. Getting it wrong could leave you committing criminal offences without knowing it.

If you only had one (or no) residential units, then the BSA rules relating to registration and management and the limits on service charge recovery don't apply.

2. How tall is the building/how many floors does it have?

Your building has two residential units, so the next question is: how tall is it?

If your building is at least 18 metres high or has at least seven storeys, generally it will be classed as a "higher risk building" ("HRB"). There are some limited exceptions to that rule, but they're beyond the scope of this note.

There are detailed rules and guidance on how you measure the height of a building (see: https://www.gov.uk/guidance/criteria-for-being-a-higher-risk-building-during-the-occupation-phase-of-the-new-higher-risk-regime).

In addition, if the building is least 11 metres high or has at least five storeys it will generally be a "relevant building" ("RB"). Again, there are some limited exceptions to that rule, which are beyond the scope of this note.

The obligations relating to HRBs are designed to ensure day to day operational safety of the building for users and occupiers. In contrast, the rules relating to RBs are focussed on putting right historic issues and the costs of doing so.

Any building that is a HRB will usually also be a RB, but there are some limited exceptions.

Here our building is 20m high, so we need to look at the rules relating to both HRBs and RBs.

3. Who's the current Accountable Person ("AP") and Principal Accountable Person ("PAP")?

This point 3 and points 4-8 below only apply to HRBs.

 On a purchase of a HRB, you need to establish who the current AP and PAP are so that you can obtain essential information (prescribed by the BSA) from them and to check that, at least up to the date of sale, the relevant BSA obligations have been complied with.

Anyone who holds the freehold, or a leasehold interest in the common parts and structure of the property, and who has the principal responsibility for repairing those common parts and the structure will generally be an AP.

If there is only one AP, as will often be the case once the building has been constructed, that person is also the PAP. APs may be individuals, partnerships or corporate bodies and there may be more than one AP for a building.

In our case, the seller is solely responsible for repairing both the common parts and structure so is both an AP and the PAP.

4. Who's going to be the AP and PAP following purchase?

Assuming you go ahead and buy the property, you will become an AP and the PAP as you will take over control for the common parts and structure.

Note that you can't contract out of your obligations. You may appoint a managing agent, but, even if they are contractually responsible to you, you remain ultimately liable.

Failure to comply with AP or PAP duties generally amounts to a criminal offence, so you should take specialist advice to make sure that you comply with your obligations.

5. Do you understand your obligations as PAP?

The BSA imposes some substantial obligations on APs and PAPs. As an overview of what you'll need to do (and check that the seller has done), you must:

5.1. Assess building safety risks
Each AP must assess the building safety risks for the part of the building for they're responsible for. You'll need to carry out an assessment as soon as you buy the building, so make sure that's in hand.

Building safety risks are, broadly, risks to the safety of people in or about a building arising from the spread of fire or structural failure.

The duty to assess the risks is ongoing and you'll need to carry out further assessments at regular intervals and at any time that you suspect that the current assessment is no longer valid.

5.2. Manage the building safety risks
Once the risks have been assessed you must manage the building safety risks. That means promptly taking all reasonable steps to prevent building safety risks materialising and to reduce the severity of any incident resulting from any risk.

5.3. Prepare safety case reports
When you buy the property, you must prepare a new "safety case report". Safety case reports are the main way that the Building Safety Regulator ("BSR") will check that APs are fulfilling their duties. Once you've prepared the new report you must notify the BSR.

The safety case report should contain the assessment of the building safety risks and a brief description of the steps taken to manage those risks, with an explanation of why those measures were chosen.

The safety case report should be revised when necessary and whenever a new assessment is made.

5.4. Provide information on "mandatory occurrences" to the BSR
You must report certain structural and fire safety occurrences to the BSR and establish a "mandatory occurrence reporting system". Reporting focuses on occurrences that are of a significant risk to life safety.

5.5. Keep and provide "golden thread" information about higher risk buildings
You must keep and update prescribed key safety, or "golden thread", information about the building. The principles governing how the golden thread should be kept and maintained include provisions that it must be: kept in electronic format; secure and accessible; an interoperable single source of truth; and only changed in accordance with procedures which record the person who made the change and the date of that change.

APs must hand over the golden thread information to successors, so check that you get the relevant information.

5.6. Engage with residents
PAPs must have a strategy for promoting the participation of residents and flat owners in building safety decisions. The strategy must include information about: the information that each AP will provide about decisions relating to the management of the building; decisions that the AP will consult residents about; arrangements for obtaining and taking account of the views of residents; how the effectiveness of the engagement strategy will be measured and reviewed.

Each AP must give a copy of the strategy to the residents and flat owners in the part of the building they're responsible for as soon as reasonably practicable after it has been prepared and whenever it's revised.

The type of information to be made available includes: full current and historical fire risk assessments; planned maintenance and repair schedules; outcomes of building safety inspection checks; information on how the building is managed; details of preventative measures; details of fire protection measures and the fire strategy for the building; information on the maintenance of fire safety systems; structural assessments; and planned and historical changes to the building.

5.7. Establish a complaints procedure
The BSA provides for two complaint procedures, one to be set up and operated by the PAP and the other by the BSR.

5.8. Consider BSA obligations in conjunction with other fire safety obligations
In our scenario, it's likely that, when you buy the property, you will also be the "Responsible Person" for fire safety legislation, so you'll need to ensure that your fire risk assessment tallies and is coordinated with your building safety obligations under the BSA.

6. Check the "Gateway 3" completion certificate

Once the development of a higher risk building (or substantial works to it) is complete a "gateway 3" completion certificate must be issued before any residential unit in the building is occupied.

Whilst it doesn't appear relevant in our scenario, if the building had been newly constructed or substantial works had been carried out, you would need to check that the certificate had been issued.

7. Check that that the building has been registered with the BSR

The building should already be registered with the BSR – but check that.

Once you've purchased the property you must update the registration information within 14 days and provide further notifications if you become aware of other changes.

8. Find out if a Building Assessment Certificate ("BAC") has been requested by the BSR and/or applied for and/or issued

PAPs must apply for a building assessment certificate for a registered building within 28 days of being requested to do so by the BSR.

Holding a BAC is not a prerequisite to occupation, but an obligation to apply for a building assessment certificate is triggered by the BSR making a request, which it will do periodically.

When applying for a BAC you must send a suite of documents to the BSR demonstrating how you are managing the building.

The BSR will issue a building assessment certificate if it is satisfied that the "relevant duties" are being complied with. The relevant duties include the duties to: assess building safety risks; manage building safety risks; provide information and produce a residents' engagement strategy.

Once issued, the PAP must display the certificate in a prominent position in the building. If there is already a BAC, you will need check that this has been done.

That's it for the HRB element.

9. Establish the cost recovery implications – remediation type costs

This point 9 and points 10 and 11 apply only to Relevant Buildings.

Because the building is a RB (as well as a HRB) there are several limitations on your ability to recover remediation type costs of taking "relevant measures".

"Relevant measures" are the costs of remedying relevant defects or, in relation to a relevant defect, taking steps to prevent a building safety risk from materialising or to reduce the risk.

"Relevant defects" are widely defined in the BSA and include any building safety defects that create risks relating to structural failure or the spread of fire.

Note that even if no building safety risks have been discovered to date, that doesn't mean that such risks won't be discovered in the future.

You can't recover any costs that you incur in taking relevant measures through the service charge if the landlord (or any person related to the landlord or a superior landlord) as at 14 February 2022 ("Feb 22 Landlord") was responsible for the defect. That limitation applies to all (including the commercial) leases in the building.

In addition, no service charge is payable under any "Qualifying Leases" (see below) for the removal or replacement of unsafe cladding.

Furthermore, no service charge for "relevant measures" is payable under a Qualifying Lease if the landlord meets the "Contribution Condition" (see point 11 below).

10, Establish if there are any "Qualifying Leases"

Given that many of the protections referred to above only apply to Qualifying Leases, it's clearly crucial to establish whether the leases are "Qualifying Leases".

A Qualifying Lease is a lease:

  • of a single dwelling in a RB granted for more than 21 years;
  • that reserves a service charge;
  • granted before 14 February 2022; and
  • which, as at 14 February 2022, was the then tenant's only or principal home (or, if not, the tenant at that time owned no more than two other dwellings in the UK).

Find out if any "leaseholder deeds of certificate" ("LDC"s) have been provided. LDCs are statements issued by a tenant confirming that their lease is a Qualifying Lease. Even without an LDC it's often clear that the leases are likely to be Qualifying Leases, and, from a landlord perspective, it's best to work on the assumption that they are Qualifying Leases until you can show otherwise.

For our scenario, let's assume that LDCs have been provided for the two residential leases, i.e., they are both Qualifying Leases.

11. Has the Contribution Condition been met and has a Landlord Certificate been provided?

You won't be able to charge the tenants of the Qualifying Leases any service charge for relevant measures, unless you can show that the Feb 22 Landlord didn't meet the Contribution Condition (or was otherwise exempt). That's the case even if the Feb 22 Landlord wasn't responsible for the relevant defects.

So, it's very important to establish if the Contribution Condition has been met.

The Contribution Condition will have been met if the Feb '22 Landlord group's net worth was more than £2 million times the number of relevant buildings in the landlord's group on 14 February 2022. You'll need the seller to provide you with information to establish the position.

Any landlord who believes that the Feb 22 Landlord didn't meet the contribution condition must provide a "Landlords Certificate" at various fixed times within strict time limits, including when demanding service charge for costs relating to relevant measures.

The seller should be asked to provide all of the information that is required for a Landlord's Certificate, so that one can be produced if ever needed (it may be that it's not anticipated now, but a defect could come to light later). If the seller can't, or won't, give you the information, work on the assumption that the Contribution Condition has been met.

For our scenario, let's assume that the seller can provide a Landlord Certificate and the necessary evidence to show that the Contribution Condition has not been met. That improves the potential cost recovery position, but that means that we have to look at yet further limitations on cost recovery.

11.1. Limitations for low value Qualifying Leases

If the value of a Qualifying Lease on 14 February 2022 was less than £325,000 (or £175,000 if the property had been outside Greater London) the costs of remediating a relevant defect cannot be recovered via the service charge. Let's assume the Qualifying Leases were worth £500k each.

11.2. Limit on service charge in other cases: the permitted maximum

If none of the other limitations that would prevent the costs of remediation works being charged through the service charge apply, the amount of the service charge that is payable for relevant measures under a Qualifying Lease may still be restricted.

Service charge cost for remediation works relating to any relevant defect are capped at £15,000 (it would have been £10,000 if outside Greater London). If the Qualifying Lease were worth between £1 million and £2 million on 14 February 2022, the cap is £50,000; if worth over £2 million the cap is £100,000.

Finally, note that only 10% of the permitted maximum may be charged in any year.

12. Shortfalls – you can't collect shortfall from other tenants

OK, so you can't recover some of your likely costs from the resi tenants. You'll just shift the costs to the main service charge and let the office and retail tenants make up the difference, right?

Wrong - where the BSA restricts the recovery of service charges, you can't recover any shortfall from other tenants in the building.

You may, however, be able to claim against other landlords (past and present) depending on the circumstances.

The last word…

Getting your head around the obligations and restrictions in the BSA isn't easy, but a logical and systematic review of the rules will show you what you need to do and when.

The scenario above is very general, but once you get into real world detail there are lots of twists and turns in how the BSA applies that need to be factored in or navigated around. There are also many limitations and exemptions that this article doesn't cover but that could apply in your fact specific situation. It's easier for us because we look at these rules all the time. We'd be delighted to help you establish what you need to do and when and to help you maximise what you can recover. Just get in touch with one of our expert team: Archie Campbell, Catriona Berman, Navpreet Atwal, James Styles or your usual Stephenson Harwood contact.

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