Developer Remedial Contracts and the Responsible Actors Scheme: a closer look

Earlier this month regulations under the Building Safety Act 2022 giving effect to the Government’s “Responsible Actors Scheme” were passed into law. These regulations, and the Developer Remediation Contracts which have been entered into as a result of them (the “DRCs”), form a central plank of the Government’s strategy for ensuring the remediation of historic cladding defects in the wake of the Grenfell disaster. In this Law-Now we take a detailed look at the terms of the DRC and the new regulations, which are likely form a significant feature of the construction industry landscape in the UK for some years to come.

Introduction

On 30 January 2023 the Government wrote to large developers asking them to sign DRCs. By the end of June, 49 developers have signed the DRC. Upon signature, the DRC constitutes a legally binding agreement between the relevant developer (referred to as ‘Participant Developer’ or ‘PD’) and the Department for Levelling Up, Housing and Communities (‘DLUHC’). Further, on 25 April 2023, the Secretary of State proposed the draft Building Safety (Responsible Actors Scheme and Prohibitions) Regulations 2023 (the ‘RAS Regulations’) which as of 3 July 2023 has passed into law.

The RAS Regulations introduces sanctions on eligible developers that fail to comply with the ‘Self Remediation Terms’ set out within the DRC. The overarching purpose of both the RAS Regulations and the DRC is to facilitate the remediation of residential buildings, which were developed or refurbished during the relevant period (as defined in the RAS Regulations) and which are assessed to possess life-critical fire safety defects (the ‘Building Requiring Works’).

The RAS Regulations and the DRC consider a developer responsible for the remediation works if any corporate body within a developer’s group company carried out the development or refurbishment during the relevant period, regardless of whether the group was formed before or after the development or refurbishment of such relevant building. As a result, developers will need to actively investigate the development history of all the companies within their company structure so as not to inadvertently breach the requirements of the RAS Regulations and the DRC.

The Developer Remedial Contracts

To fully achieve the requirements of the DRC, a PD is required to fulfil the obligations set out in the ‘Self Remediation Terms’ within the DRC. We provide an overview of the key features of the Self Remediation Terms below.

Obligation to identify and assess Buildings Requiring Works

Clause 5 obliges the PD to use reasonable endeavours to investigate and identify all Buildings Requiring Works. To achieve this as early as reasonably practicable, the PD is to appoint a competent fire assessor to provide up-to-date fire safety assessments (and with regards to the guidance in the PAS 9980) and up-to-date Fire Risk Appraisal of External Wall construction or “FRAEW” for all Building Requiring Works in accordance with the standard applicable at the date of the relevant assessment. The PD is obliged to send the findings of the fire assessor to the DLUHC within ten business days.

The obligation to conduct the fire assessments will not apply in cases where (i) the PD can provide a written agreement to the DLUHC to confirm that it has previously entered into a settlement or compromise with the Responsible Entity (such settlement agreement must have been agreed after 14 June 2017 but prior to the PD signing up to the DRC); or (ii) the Responsible Entity is not being cooperative with PD; although the PD will need to continue to use best endeavours to work with the Responsible Entity and will remain obliged to take into account any options for resolving the issues as proposed by the DLUHC.

Obligation to engage with and report to third parties

Clause 8 of the DRC sets out that upon identifying the Building Requiring Works, the PD is required within 40 business days to contact the Responsible Entity and occupiers to confirm its target dates for completing the remediation works and establish an effective process for communications relating to the works. The PD is further required to respond to requests for information from any occupiers of the building within 10 business days whilst it must promptly respond to any requests for information from the DLUHC.

Additionally, the PD is required to submit a data report, an ‘assessment order and method statement’ a ‘works order and method statement’ and any information it holds in respect of the fire safety assessments (a ‘Data Report’) to the DLUHC within 30 business days of entering into the DRC and subsequently by the tenth business day after each reporting date (as prescribed in the DRC). As the obligation to submit updated versions of the Data Report is ongoing, PDs may need to continuously review details provided in previous Data Reports. Following 20 Business Days’ written notice to the PD, the DLUHC can audit the information used in the preparation of the Data Reports once every 6 months.

To evidence completion of the remediation works, the PD is required to engage an independent and suitably experienced relevant assessor to conduct a qualifying assessment in accordance with the standard prevalent at the time of the remediation works; this is the case regardless of such standard being different to or more onerous than the standard applicable at the time of the original works. Within two years of completion and on providing 20 business days written notice to the PD, the DLUHC may choose to audit the qualifying assessment. Once the qualifying assessment has been submitted to the DLUHC and/or following the successful completion of the audit by the DLUHC, the PD will be fully released from its obligations under the DRC in respect of the Building Requiring Works.

As the information provided by the PD may be published and the DLUHC has rights to audit, the PD should ensure that relevant information is stored in a manner compliant with the ‘golden thread’ principle under the Building Safety Act 2022 and for a minimum of two years.

Obligation to carry out and complete the Works

Under clause 6 of the DRC, the PD is required to without delay, remediate and/or mitigate, or fund the remediation of the Building Requiring Works (the ‘remediation works’). This involves prioritising the completion of the remediation works regardless of whether the fire assessment was carried out prior to 5 April 2022 and over its interest in recovering its own costs from available routes in the supply chain (e.g. subcontractors/suppliers engaged by the PD). However, clause 7 of the DRC provides that the PD is exempted from carrying out the remediation works where the defects are solely as a result of alterations made by an entity that is not within the PD’s group company or where the DLUHC has awarded funding for the remediation works through a relevant government cladding remediation scheme:

• the Building Safety Fund (‘BSF’);
   
• the Private Sector ACM Cladding Remediation Fund (‘PSCRF’); or
   
• the Social Sector ACM Cladding Remediation Fund (SSCRF’),

collectively referred to as the ‘Government Funds’.

The PD is obliged to bear all costs associated with the completion of the remediation works including costs of obtaining access, relocating residents, appointing professional advisers (as pre-agreed in writing with the Responsible Entity). The PD is liable for any costs incurred by an owner or tenant of the Building Requiring Works in respect of any negligence in performing the remediation works or breach of the terms of the DRC. However, the terms of the DRC confirm that the PD is not responsible for costs relating to (i) interim safety measures such as waking-watch costs; and (ii) increases in building insurance premiums.

Where the PD chooses to carry out the remediation works themselves or utilise a subcontractor, the PD must use reasonable endeavours to agree with the Responsible Entity a written contract that at a minimum includes the specific contractual terms as listed in paragraph 6.3 of the Self Remediation Terms within the DRC. One of such contractual terms is for third party rights to be granted in favour of the DLUHC so that the DLUHC can enforce the terms of the written contract against the PD.

Alternatively, the PD can agree to fund the costs of a Responsible Entity arranging for the carrying out of the remediation works, provided the Responsibility Entity agrees to this. Where this route is chosen, the PD is relieved of its obligation to carry out the remediation works, but will remain liable for any cost overruns in respect of the remediation works arranged by the Responsible Entity provided they are within the scope of the Self-Remediation Terms and are not due to the fault, negligence, act or omission of the Responsible Entity or persons employed by it in relation to the works.

The PD will still able to rely on any warranties or indemnities provided by contractors engaged in the original works, including any rights of recovery or subrogated rights under any insurance policies maintained in respect of original works, but this would be dependent on if the suppliers remain solvent or if sufficient professional indemnity insurance exists to cover these costs.

Delay

Where the obligations are qualified by ‘all reasonable endeavours’, ‘as soon as reasonably practicable’ and ‘as early as reasonably practicable’, the PD’s ability to carry out such obligations are interpreted with regards to:

• the life-critical fire-safety risk to the leaseholders, residents, occupiers and other users of the Building Requiring Works;
   
• the information available to the PD at the time in respect of the defects in the Building Requiring Works;
   
• availability of contractors such as the fire safety assessors or external wall assessors or professional consultants to perform the works;
   
• the ease of engaging relevant third parties such as the Responsible Entity (where it is not a group company of the PD);
   
• insurability;
   
• willingness of lenders to extend loans secured by interests in the Building Requiring Works; and
   
• guidance issued by the DLUHC in respect of the works.

As such, if the PD is delayed for any of the above reasons it may be interpreted as a circumstance out of the PD’s control. With regards to the PD’s ability to procure a loan against a Building Requiring Works, it is worth noting that the practical process to be followed for granting an interest in the relevant building to a lender where the PD no longer owns or have any interest in such building except to perform the remediation works remains unclear.

Joint Ventures

Pursuant to clause 18 of the DRC, where the PD developed the Building Requiring Works as part of a joint venture (‘JV’), the PD is required to provide evidence of the JV arrangements, including any agreements and profit-sharing details to the DLUHC and the PD remains bound to fulfil the obligations of the Self Remediation Terms within the DRC. The DRC further provides that if the PD is able to submit a reliance letter  to the DLUHC from an independent and reputable legal or accountancy practice, confirming that the PD was only entitled to less than 50% of the “Economic Return” from the Building Requiring Works, the PD will be excluded from having to commence performance of the remediation works whilst it uses reasonable endeavours to recover sums in respect of the costs of the relevant works which are proportionate to each JV partner’s share of the remainder of the profit. In this regard, the PD may explore the following options:

• If the PD is able to recover the proportionate cost of the remediation works from the JV partner(s), the PD must carry out or fund the remediation works in accordance with the terms of the DRC. If the PD is unable to do so, the PD can request for the DLUHC to provide the remaining funds; a request which the DLUHC can accept at its own discretion.
   
• Conversely, if the PD is unable to recover the proportionate cost of the remediation works from the JV partner(s) and the Building Requiring Works qualifies for funding from a relevant fund, then the PD may choose not to undertake the remediation works and inform the Relevant Entity to apply for funding instead; although, the PD will be required to pay its relevant share and any costs recovered from the JV partner(s) to the DLUHC. However, if the Building Requiring Works does not qualify for funding, the PD remains responsible for performing the remediation works in accordance with the terms of the DRC.

Generally, the PD is required to assist the DLUHC in securing the signature of other members of the JV partnership to the DRC; although the nature of assistance that will required is not described. If any JV partner signs up, then PDs in the same JV partnership are required to decide which entity is to carry out the remediation works and work together efficiently.

Transfer of Buildings and Reimbursement of Government Funds

The DRC requires remediation work already being arranged or carried out pursuant to a Government fund to be transferred to the PD and/or for the PD to reimburse the Government for payments made in respect of those works.    

The Government recognises four Building funding stages, referred to as stage A fund, stage B fund, Stage C fund and Stage D fund.  

• Stage A Fund building: is a building for which the building application has been made by the Responsible Entity but the DLUHC has not communicated an award of funding for the full costs of any remediation. The stage A fund is for a Stage A tender. 
   
• Stage B Fund building: is a building for which the building application has been made by the Responsible Entity but the DLUHC has not communicated an award of funding for the full costs of any remediation. The stage B fund is for a stage B tender.
   
• Stage C Fund building: means a building that is at stage B tender where the DLUHC has communicated an award of funding for the full costs of any remediation but the DLUHC has not signed a funding agreement.
   
• Stage D Fund building: means a building that is at stage B tender where the DLUHC has communicated an award of funding for the full costs of any remediation and the DLUHC has signed a funding agreement with the applicant Responsible Entity. 

In relation to any of the stages, where the Responsible Entity has incurred costs or has utilised the Government Funds to support any costs associated with the remediation works (save for costs relating to obtaining fire certificates), the PD is obliged to reimburse the Government Fund and/or the Responsible Entity within 90 days of any demand for payment. If the PD wishes to challenge any reimbursement statement, it must inform the DLUHC in writing within 60 days. Additionally, if a PD is unable to afford the reimbursement, the PD can apply to the Government for approval of a detailed payment plan.

In respect of remediation works, the PD may choose to take over completion of remediation works that have commenced under a fund, or where the remediation works are yet to commence, the PD must request for the transfer of the Building Requiring Works from the Government Fund. In both instances, the PD is obliged to keep the Responsible Entities, occupiers and DLUHC updated on the progress of the remediation works in line with the notice requirements set out below.

Given the PD is required to bear the costs of all remediation works, there is possibility of claims or complaints from leaseholders requiring the remediation works to be completed urgently.

The Responsible Actors Scheme

The terms of the RAS Regulations are intended to apply to developers that satisfy one or more of the eligibility criteria detailed below (note that registered providers of social housing are excluded from the RAS Regulations).

The eligibility criteria applied are:

1. The developer’s principal business is residential property development; the developer meets the ‘profit condition’ and has developed or refurbished a residential building in England that are at least 11 metres in height (defined in the RAS Regulations as a ‘relevant building’) between 5 April 1992 and 4 April 2022 (defined in the RAS Regulations as the ‘relevant period’).
    
2. The developer meets the ‘profit condition’^[1] and is responsible for the development or refurbishment of buildings which have been assessed as eligible for a Government Fund prior to the RAS Regulations coming into force.
    
3. The developer has developed or refurbished at least one relevant building which qualifies for remediation under the terms set out in the DRC and volunteers to sign the DRC and join the RAS Regulations.

As a condition of membership to the RAS Regulations, a developer must sign the DRC (and adhere to the Self Remediation Terms) and provide information to the Secretary of State as required by the DRC. Under regulation 24 of the RAS Regulations, if a developer does not comply with the membership conditions or is found to be in material breach of the obligations of the DRC, the developer’s membership to the RAS Regulations will be terminated. Within the terms of the DRC, material breach includes persistent breach by a developer where notice of such breach has been provided by DLUHC to the developer. Additionally, membership of any developer that avoids its obligations under the RAS Regulations and by extension the DRC will be revoked.

Regulation 23 addresses avoidance tactics and requires that a member of the scheme must not ‘themselves take, or procure other persons to take, any step where the main purpose, or one of the main purposes, is to avoid the member’s obligations under these Regulations or to frustrate the purposes of the scheme’.

Consequences introduced by the RAS Regulations

Eligible developers that neglect the notice of invitation from the Secretary of State to join the RAS Regulations or any developer that has its membership revoked under regulations 24 will be placed on a Prohibitions List, along with any corporate body controlled by such developers.

The proposed sanctions for developers on the Prohibitions List include: 

• the planning prohibition: affected developers will be prevented from being able to obtain planning permission to carry out major developments^[2] in England and have to notify the Local Planning Authority if they acquire interest in land which has the benefit of planning permission for major development;
   
• the building control prohibition: local authorities and approved inspectors are prevented from accepting from or issuing to a prohibited developer, documents and certificates relating to building control approval.

The introduction of the Prohibitions List by the RAS Regulations will inevitably affect the profitability and market reputation of developers in the event that these sanctions hinder their ability to start or complete projects.

Conclusions and implications

The terms of the DRC and the RAS Regulations apply retrospectively to relevant buildings that were developed up to 30 years ago which will result in a significant number of buildings qualifying for remediation works. Considering the pressure that the terms of the RAS Regulations and the DRC seek to place on PDs to commence the remediation works promptly, PDs are likely to have reduced bargaining power in negotiating contracts with remedial works contractors, fire assessors and the like. Shortages in the required professional services, materials and resources may also lead to price instability over the short-term.

PDs will also need to carefully consider their resource, knowledge and financial capability to undertake the onerous administrative tasks imposed by the DRC such as investigations into relevant buildings, data reporting, adhering to notice requirements and deadlines for communicating with third parties, and the electronic archiving of information or documents. Moreover, for PDs that are obliged to perform remediation works on relevant buildings that do not qualify for funding or other routes of relief, such PDs may be compelled to enter into loan facilities in the current high interest rate economy which may have longer term consequences to the business of these PDs.

References:

Form of Developer Remediation Contract

The Building Safety (Responsible Actors Scheme and Prohibitions) Regulations 2023

^[1] To satisfy the profit condition, a developer must have an average adjusted operating profit of £10 million or higher over the financial years ending 2017, 2018 and 2019 (excluding non-recurring items and unrealised valuation adjustments).

^[2] This refers to schemes providing 10 or more residential units, residential schemes on a site at least 0.5 hectares in size (where it is not known if it will provide 10 units or more), commercial development creating at least 1000 square metres of floorspace and development on a site over 1 hectare in size.