The Court has previously offered guidance on applications for building liability orders, but never granted one, until it handed down judgment in 381 Southwark Park Road RTM Company Limited (RTM) and others (the Leaseholder Claimants) v Click St Andrews Limited (in liquidation) (Defendant 1) and Click Group Holdings Limited (Defendant 2).
A building liability order (BLO) was made against Defendant 2 – the parent company (once removed) of Defendant 1 – in respect of Defendant 1's liability for losses arising from a "building safety risk"; that being a "risk to the safety of people in or about a building from the spread of fire or structural failure" under section 62 the Building Safety Act 2022 (the BSA).
BLOs are a remedy under the BSA, which pierce the corporate veil by enabling parties to pursue companies 'associated' to parties that are culpable for certain defective work. Under section 130 of the BSA, the High Court may make a BLO – if it considers it "just and equitable" to do so – against an "associated body corporate" of an organisation that has incurred liability either:
(i) under the Defective Premises Act 1972 (the DPA),
(ii) under section 38 of the Building Act 1984 (not yet in force), or
(iii) as a result of a building safety risk;
each of those being a "relevant liability" under the BSA.
In the context of BLOs, the BSA provides that companies are 'associated' if one controls the other, or a third corporate entity controls both, and specifies the parameters in which a corporate entity is regarded as controlling another.
Underlying dispute
The claimants' application for a BLO was determined separately to the substantive dispute, which concerned a claim for damages arising from defects to a block of flats primarily:
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against Defendant 1 for:
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breaches of covenants in leases with the Leaseholder Claimants (including the covenant of quiet enjoyment);
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breach of a statutory duty under section 2A of the DPA, which:
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introduced a statutory duty to those with an interest in existing dwellings (e.g. leaseholders) to ensure that work completed to the dwelling was carried out in a professional and workmanlike manner and with proper materials so that, as regards that work, the dwelling was fit for habitation upon completion; and
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if breached, triggered an entitlement to apply to the court for a BLO against Defendant 2; and
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against both defendants for breaches of a freehold purchase agreement between RTM (as 'nominee' for and 'principal' of the Leaseholder Claimants) and Defendant 1 (the Contract). Defendant 1's performance under the Contract was guaranteed by Defendant 2, which entitled RTM to pursue both for contractual breaches.
Under the Contract, Defendant 1 – an SPV and owner of the freehold and headlease – was to develop the block of flats by removing the roof and adding further dwellings to the top storey. RTM intended to purchase the freehold and grant leases of the new dwellings to Defendant 1 for it to sell on. Following the roof removal, the building was not kept watertight, and damage was caused to the existing flats. Structural and fire safety issues were also identified.
At trial, the defendants were not legally represented. The court found that:
- Defendant 1 was in breach of the Contract and leases, and the claimants were entitled to damages.
- A statutory duty was not owed under section 2A of the DPA as it came into force after the work was completed, and did not give rise to a retrospective cause of action (unlike section 1 of the DPA).
- Defendant 1's structural and fire safety breaches created a building safety risk (and, therefore, a "relevant liability" under the BSA).
In the substantive dispute, Defendant 2 was liable to RTM for losses flowing from Defendant 1's breaches of the Contract. In reliance upon the identified building safety risks (and abandoning reliance upon the DPA), the claimants applied for a BLO against Defendant 2 in an attempt to hold it liable for all damages awarded in the underlying claim.
To afford Defendant 2 an opportunity to respond, the court heard that application at a consequential hearing.
Consequential judgment
In granting a BLO against Defendant 2, the court determined that the "relevant liability" of Defendant 1 – that being its liability for losses arising from identified building safety risks – was also the liability of Defendant 2.
In doing so, the court considered the First Tier Tribunal's (FTT) approach when awarding a remediation contribution order (RCO) in Triathlon Homes LLP and Stratford Village Development Partnership [2004] (which is subject to appeal and the judgment on that is awaited). An RCO is another remedy under the BSA, which also requires consideration of whether it is 'just and equitable' to make the order. The FTT said that – in exercising this discretionary power – it should have regard to the purpose of the BSA in this context, which it said was to attach liability to associated companies so that 'wealthy' parent companies, or other associated entities, could not avoid responsibility for certain defective work being carried out by an SPV with little or no assets, by hiding behind it being a separate legal entity.
The court in this case confirmed that:
- Defendant 2's liability for losses equates to those that flow from the identified building safety risk; not losses arising from other matters (e.g. water ingress).
- It was just and equitable to make the BLO because of Defendant 2's association to Defendant 1, which was one of control because of commonalities in directing minds and Defendant 2's beneficial ownership of Defendant 1.
- An 'associated' company's financial instability does not affect the making of a BLO against them.
Comment
This judgment provides clarity regarding the court's approach to BLOs, although how useful it will be here is unclear given Defendant 2's financial circumstances.
Usefully, the court confirmed that respondents to BLO applications do not need to be named in proceedings in which the "relevant liability" of their associate is established, but if such entities are known it would be sensible to join them.
The court also highlighted that establishing that a "relevant liability" is not a gateway to recovering all losses from a party against which a BLO is made, as that is not what the legislation intended (given its restriction to defined 'relevant liabilities'). BLO applicants therefore need to be mindful that a BLO may not cover all their incurred losses.
Given that BLOs can now pierce the corporate veil for certain defects, developers, contractors and designers would benefit from revisiting potential residual liabilities across their group structures for defects on legacy projects, particularly on residential development projects where the time limit for pursuing claims under section 1 of the DPA was retrospectively extended by the BSA from 6 years from completion to 30 years (for claims accruing before 28 June 2022) and prospectively to 15 years.
