Who pays when things go wrong?

The Building Safety Act addresses the issue of who is financially responsible when building work is defective. Freeholders and leaseholders are now intended to be the last, rather than the first, port of call. To formalise this, the Act introduces a waterfall structure.

What is the statutory waterfall structure?

The Waterfall structure is a chain of liability for historical safety defects. It applies to all buildings which are at least 11 metres tall. The chain is:

1. Developers and/or manufacturers
2. Professional teams engaged in the development or relevant refurbishment
3. Government funding (if available)
4. Freeholder (landowner)
5. Leaseholders - but in extremely limited circumstances and subject to new limitations.

Developers should be aware that while the Act recognises that they may not be able meet the full cost of remediation, it obligates them to exhaust all other options before turning to freeholders and leaseholders. This includes providing extensive information as to the means of the developer and all entities within their corporate structure (including owners and directors), failing which no recovery can be made through leasehold arrangements.

What remedies are available to Freeholders?

Freeholders being pursued for remedial costs have options. They can:

• claim against contractors, developers or consultants for breach of contract or negligence
• claim under Section 1 of the DPA. This imposes a duty on people working on - or in connection with - a dwelling to ensure that their work is completed in a workmanlike and professional manner. They must ensure that the dwelling is fit for habitation for a reasonable period without risk to the health and safety of the occupants and without undue discomfort
• claim against manufacturers of defective or mis-sold products which play a part in causing a dwelling to become unfit for habitation. As we mentioned above, this is a new provision of the Act
• claim against builders who have signed the Industry Pledge to remediate life-critical fire-safety defects. This applies to buildings 11 metres tall or higher, developed or refurbished since 5 April 1992
• request a Building Liability Order in the high court. This empowers claimants to enforce decisions against sufficiently resourced parties.

What leaseholder protections are in place?

From 28 June 2022, leaseholders are financially protected where:

• the removal and replacement of unsafe cladding is part of the outer wall or an external wall system
• the landlord's net worth is higher than £2 million (subject to conditions) per building
• the value of the lease is lower than £325,000 in Greater London and £175,000 elsewhere
• the landlord is responsible for the defect or is associated with the party responsible for it. 

The protection covers buildings that are at least 11m high, comprise two or more dwellings and that are not leaseholder-owned.

Building Safety Levy

The Building Safety Levy exists to cover the costs of remediation where no responsible developer can be found. Funded by existing developers and the Government, the levy was extended in April 2022 to cover new residential buildings in England. This is expected to add some £3 billion to the levy within a decade.

Leaseholder liability

If all options have been explored or where the above criteria don't apply, landlords can then look at recovering service charges from leaseholders. However, this right is capped at £15,000 for non-cladding fire safety related defects in Greater London and £10,000 elsewhere. Some technical exceptions, such as where a waking watch is involved, will apply here.