Court of Appeal guidance on allocations under the Building Safety Fund

A recent Court of Appeal decision provides valuable commentary on the correct approach to the making of allocations under the Building Safety Fund (the “BSF”) for the funding of fire-safety remedial work. The developer in question had challenged an allocation made by the government on the basis that insurers of the buildings had accepted liability and that recoveries from insurers should be enforced prior to the making of any allocation under the BSF.

The Building Safety Fund

The BSF is overseen by the Department for Levelling Up, Housing and Communities (the “DLUHC”) and has more than £5bn available to fund the carrying out of fire-safety works. The government has issued guidance detailing how applications for allocations from the fund will be dealt with (the “Guidance”). The Guidance states that the fund is intended to “meet the cost of addressing life safety fire risks associated with cladding on high rise residential buildings where building owners (or other entities for making buildings safe) are unwilling or unable to afford to do so.”

To be eligible for an allocation, an applicant to the BSF must establish that it is a “Responsible Entity”, which means that it has legal obligation or right to carry out works to rectify life-critical fire-safety risks associated with cladding; for example, a freeholder, head lease owner, or management company with a legal entitlement or obligation to repair. The applicant must detail the life-critical fire-safety risks that are present in the relevant building and outline what remedial works are required to rectify them. If the application is approved, DLUHC will release funds to the applicant to cover the costs of necessary remediation work, including the costs of removing any unsafe cladding and ensuring the completed works comply with fire-safety standards and regulations.

The purpose of the BSF is to ensure that these safety-critical defects can be rectified without delay. In the words of the Guidance, the BSF is intended to ensure that residents of high-rise buildings “are safe – and feel safe – in their homes now”.

The economic viability of the BSF is underpinned by pledges taken by the government from a large number of developers. These pledges commit the developers to carry out or fund work to remediate life-critical fire-safety issues on high-rise buildings they have played a role in developing or refurbishing over the last 30 years in England.  As part of this pledge, these developers have agreed to reimburse the BSF in relation to any funding allocated to Responsible Entities in respect of those buildings covered by the pledge. The developer pledges have now been formalised in legally enforceable Deeds of Bilateral Contracts with DLUHC (the “DBCs”).

In addition to reimbursement by developers, allocations under the BSF may also be recovered through claims available to Responsible Entities, such as under insurance policies, the original construction contracts or consultant appointments in relation to the building, or under statutory rights of action such as the Defective Premises Act 1972. Consistent with this, the Guidance requires applicants to have taken “all reasonable steps to recover the costs of addressing the life safety fire risks caused by the cladding from those responsible through insurance claims, warranties, legal action etc.” Where any such action is successful, the applicant is required to reimburse the BSF in respect of any monies recovered. Whether such claims need to be prosecuted to a conclusion before an allocation is made from the BSF was considered in the case reported below.

Redrow Homes Ltd v Secretary of State for Levelling Up

Redrow is a signatory to the developer pledge and the developer of two high rise residential tower blocks in Birmingham known as “Hemisphere” and “Jupiter 2”. Many residents who acquired long leases in these developments purchased 10-year home warranty insurance policies.

The two tower blocks were subsequently identified as having cladding defects which posed life-safety fire-risks. The leaseholders claimed on their respective insurance policies and, in April 2022, insurers accepted liability in relation to the Hemisphere defects. Acceptance of liability in respect of Jupiter 2 followed in September 2022.

In the interim, the management companies for the two developments applied for an allocation under the BSF. DLUHC consulted with Redrow over these applications. Redrow objected to the making of any allocation due to the fact that insurers had accepted liability in relation to the defects. Redrow relied on the Guidance as requiring an applicant to exhaust other avenues of recovery. Given that insurers had accepted liability, Redrow claimed that DLUHC should require the management companies to fund the works through insurance recoveries.

DLUHC disagreed with Redrow’s stance, noting that insurance recoveries would not be available to allow the remediation works to commence by their proposed commencement dates in September and October 2022. DLUHC instead proposed to make an allocation to allow the works to commence on time, with Redrow reimbursing DLUHC in respect of those funds and any insurance proceeds subsequently being credited back to Redrow. After confirming that Redrow had no interest in carrying out the remediation works itself, DLUHC decided to proceed in this way and sought reimbursement from Redrow in late August 2022.

Redrow brought proceedings to challenge DLUHC’s decision. As Redrow only entered into a DBC with DLUHC in March 2023 it did not have a contractual basis for its challenge, but sought judicial review instead. Although a number of procedural matters were raised in the proceedings, the primary basis for Redrow’s challenge was its contention that DLUHC had not followed the Guidance by wrongly prioritising the swift commencement of remediation works over the need for all reasonable steps to be taken to recover the costs of remediation from others, particularly where insurers had accepted liability. Redrow’s challenge was dismissed at first instance and then appealed to the Court of Appeal.

Decision upheld

The Court of Appeal upheld DLUHC’s decision and dismissed the appeal. The fact that the Guidance required applicants to have taken “all reasonable steps” to recover the costs of remediation elsewhere did not imply that those steps needed to have been exhausted or proved to be unsuccessful. A key objective of the BSF as set out in the Guidance was to resolve life-critical fire-safety issues as quickly as possible. The need to act swiftly was “baked into the whole rationale for the BSF”. Implying such a requirement was therefore unnecessary and at odds with the purpose of the scheme.

DLUHC was therefore justified in prioritising the need to keep the proposed commencement dates for the remediation works over the potential to fund the works through insurance recoveries. Although noting that the need for speed will be a significant factor in any decision to allocate funding under the BSF, the Court noted that it will “not necessarily be a ‘trump card’ in every situation”.

The Court also noted that the management companies had taken all reasonable steps in relation to their insurance claims. Admissions of liability had been obtained, but the insurers were in administration and obtaining payment could be delayed or liability subsequently disputed. That was not something which ought to prevent an allocation of funding under the BSF.

Prior to the Court’s decision, insurers for one of the developments had written to say that in light of the allocation of funding, they no longer considered a claim under the policy to be viable. The Court took the opportunity to comment on this development, noting that such an argument “may not be sound in law” due to an earlier case (Design 5 v Keniston Housing Association) which had held that the receipt of public funds to carry out remedial works could not be taken reducing the loss suffered by a claimant, the claim in that case being against an architect.

Conclusions and implications

This decision provides helpful clarity as to the approach to be taken in relation to BSF applications, where the prospect of third party recoveries are said to justify the deferral of an allocation under the fund. Whilst the decision considers this issue from a judicial review standard point, the Court’s reasoning is likely to be relevant to similar challenges brought under the terms of the DBCs entered into between DLUHC and those developers who have given pledges.

This case also illustrates the contest which is likely to arise in many BSF allocations as to final responsibility for reimbursement of the fund. In the present case, Redrow had sought to apply pressure for insurance recoveries to be enforced prior to any allocation so as to avoid the need for it to reimburse the BSF. Insurers, on the other hand, sought to take advantage of the allocation to deny liability under their leaseholder policies. It remains to be seen who, between these parties, will ultimately bear the cost of the remediation works; whether insurers will be successful in their denial of liability or, if they are not, whether they can divert responsibility back to Redrow through the bringing of subrogated claims.

References

Design 5 v Keniston Housing Association Ltd [1986] 34 B.L.R. 92

Building Safety Fund application guidance 

Redrow plc v Secretary of State for Levelling Up, Housing and Communities [2024] EWCA Civ 651