English Court of Appeal upholds retrospective effect of Building Safety Act in further warning for landlords and developers

The Court of Appeal recently handed down decisions in two significant cases concerning the scope and application of part 5 of the Building Safety Act 2022 (BSA), particularly in respect of remediation contribution orders (RCOs) and cost recovery via service charges.

The appeals in Triathlon Homes LLP v Stratford Village Development Partnership and Adriatic Land 5 Ltd v The Long Leaseholders at Hippersley Point were both dismissed leaving the first instance decisions to stand. The decisions also provide clarification on the policy objectives of the BSA, the role of developers and associated entities, and the position of public funding in the remediation landscape.

The BSA is not primarily concerned with actual liability but rather with the parties' ability to financially withstand the consequences of having to pay for the repair of safety defects. It also takes into account those parties who had control over how building safety was originally addressed and implemented. Importantly, this does not necessarily include the taxpayer, who has often been seen as the party with the broadest shoulders of all. Any money obtained from the public purse should be considered a loan, and active steps should be taken to seek an RCO to reimburse the fund.

Triathlon and Hippersley Point issues

In Triathlon, the Court of Appeal considered the question of whether it was just and equitable to make an RCO under section 124 of the BSA. Re-affirming an earlier First-Tier Tribunal (FTT) decision on RCOs and this point, it unanimously decided that it was, irrespective of the date the defects occurred and the motivation of the applicant.

In Hippersley Point, the issues centred around whether the protections in schedule 8 to the BSA (relating to remediation costs and associated legal costs under qualifying leases) should apply retrospectively, before the BSA came into force in June 2022. The court confirmed that it did and that such retrospectively was not a breach of human rights law.

Court of Appeal ruling

The court affirmed the policy of the BSA that original developers and their associated entities should bear the primary financial responsibility for the remediation of buildings. This is reflected in the provisions of schedule 8, which protect leaseholders from service charges if the developer or an associated company retains an interest in the building.

The court confirmed that section 124 operates with retrospective effect, allowing RCOs to apply to costs incurred before the BSA came into force. This ensures that leaseholders who have already paid service charges for remediation costs can seek reimbursement through RCOs. The court held that the existence of public funding does not preclude the making of RCOs. Where it is just and equitable to do so, those with relevant associations to the building, particularly developers or their parent companies, can still be required to contribute, regardless of whether the works are being publicly funded.

The court emphasised the importance of the "just and equitable" test under section 124, which is not a rigid formula but a broad, discretionary standard that must be applied in light of all relevant circumstances. There may be reasons why an RCO should not be made, depending on the specific facts of each case, and the FTT retains the generous ambit of discretion to determine this. The FTT itself emphasised that while developers are at the top of the tree, there is no presumption that an RCO should be made against a landlord or developer; there are instances where the balance or justice might sit differently, for example, when considering charitable organisations.

Dissenting judgment in Hippersley

Lord Justice Newey dissented on the retrospective construction issue in Hippersley Point. He concluded that paragraph 9 of schedule 8 should be interpreted to mean that in terms of relevant defects, no service charge is payable under a qualifying lease for relevant costs incurred on or after 28 June 2022.

Lord Justices Nugee and Holgate held that from 28 June 2022, no service charge is payable, regardless of whether costs had already been incurred or service charges had already been demanded or fallen due – provided that these had not already been paid. This interpretation arguably aligns with the legislative intent and purpose of providing immediate protection to leaseholders against unaffordable bills.

Osborne Clarke comment

The consequences of these judgments will be far-reaching and could be subject to further appeals.

Even if there is no appeal in either case or the appeals fail, the "just and equitable" test is an area ripe for consideration and dispute. If there is no automatic presumption that a developer must pay, the words "just and equitable" must mean something and the courts may be called upon to determine exactly what that is.

The significance of the retrospective effect of this legislation cannot be understated. RCO applications are expected to rise as management companies and landlords seek to recover funds to replenish service charge accounts and/or pay back publicly funded remedial works. RCOs are increasingly being seen as a cheaper and quicker alternative to other, more traditional remedies through the courts. With many shell development companies having gone into liquidation and the public fund having stepped in, we may see an increase in claims against developers and associates but also by developers against other contractors, companies and consultants to re-coup their losses. Already, the recent Supreme Court judgment in URS Corporation v BDW Trading clarified important aspects of UK building safety legislation as well as some fundamental principles around the scope of the duty of care and recoverable losses in negligence cases.

The necessity for heightened due diligence and insurance packages will increase when purchasing development companies as RCOs can address liabilities going back 30 years prior to 28 June 2022. The Court of Appeal confirmed that a change of beneficial ownership will not affect the "just and equitable" test, meaning purchasers inherit the risk of unforeseen liabilities attached to a company and the FTT will consider the positions of both the respondent and applicant in the round, offering a more direct route for compensation in the spirit of the BSA.