The final provisions of the Building Safety Act 2022 (the “Act”) were implemented from 1 October 2023 [1]. Over a series of articles [2], our Building Safety Team has discussed the new building safety regime implemented by the Act (the “Building Safety Regime”) and the impact of the Building Safety Regime to the construction industry [3]. However, whilst many in the construction industry continue to grapple with the practical steps needed to be taken, in the real estate finance world many funders in particular are yet to fully appreciate the requirements of the Building Safety Regime, what questions they should be asking or whether any protections should be sought.
Impact of the Act on Funders
As we explored in our article in April 2024 [4], although the expectation is that, in the majority of cases, the obligations arising out of the Building Safety Regime will fall to the borrower or obligors and the professional team, given the potential consequences of failure, a funder would want to ensure that the obligations have been satisfied. It would also not be inconceivable that, in the event of enforcement (whether by way of enforcement of security or by way of exercise of rights of step-in), a funder could become an “Accountable Person” or dutyholder, inheriting obligations under the Building Safety Regime.
Addressing the Act in lending transactions
Whilst a great deal of the focus arising out of the Act relates to the construction phase in relation to Higher Risk Buildings, the Building Safety Regime applies, in different aspects, to all buildings, and should be considered through the life cycle of the asset. The application of the Building Safety Regime will therefore be of potential relevance to all real estate lending transactions.
In April 2024, the Loan Markets Association (“LMA”) published its guidance note on the Act [5]. In that note, whilst the LMA offered some suggestions regarding compliance with the Act such as including additional conditions precedent and information rights, in its view including specific obligations was unnecessary, commenting that “the obligation to comply with the BSA is already covered by the compliance with laws and the authorisations undertakings”.
Whilst reliance on the general obligation on obligors to comply with all laws would ensure that a breach of the Act constitutes an Event of Default, in our view it is preferable that, where the Act applies, specific obligations are incorporated to specifically address and signpost the obligations. Examples might include:
- evidence that the requirements of Gateways 1 and 2 have been met prior to commencement of development
- an obligation to ensure that the building is registered with the Building Safety Regulator prior to occupation (section 78 of the Act)
- an obligation to notify if the Building Safety Regulator requires the owner to apply for a building assessment certificate and to promptly maintain it (section 79 of the Act)
- obligations in relation to the “Golden Thread”
- an Event of Default if the Building Safety Regulator makes a special measures order and/or appoints a special measures manager (schedule 7 of the Act)
Running alongside preparation of the loan documentation, lenders will need to consider what, if any, due diligence is required in connection with the funding of (in particular) Higher Risk Buildings. It is anticipated that, in due course, the CLLS Certificate of Title will be updated to include disclosures in relation to the Building Safety Regime but, for now, there is no standard reporting. We have seen a divergence of approaches by lenders, with some requiring full reporting, and others relying on confirmation of compliance by the relevant property owner.
Our real estate finance team works closely with our Building Safety Team and is well placed to advise on all aspects of the Building Safety Regime as they apply to real estate lending transactions.
If you would like to discuss this further, please contact Alistair Rattray (Alistair.rattray@burges-salmon.com) and for construction-related enquiries please contact Richard Adams (Richard.Adams@burges-salmon.com) who heads up the Construction and Engineering Building Safety Team.
[1] Building Safety: New building safety regime is now live, Tom Weld
[2] Burges Salmon blog
[3] Building Safety Regime – one year on: what do clients really need to know?
[4] Building Safety Act: What does it mean for funders?
[5] https://www.lma.eu.com/download?p=23237500-65921