Building Liability Orders – changing recovery and enforcement of claims

Alright, let’s start with the basics: what on earth is a BLO, or Building Liability Order?

BLOs came into existence on 28 June 2022, courtesy of the Building Safety Act 2022. They essentially allow the court to pierce the corporate veil to extend liabilities of one body corporate (company, limited partnership etc) to any associated corporate bodies on a joint-and-several basis, including corporate bodies that are insolvent or have been dissolved.

The main aim of this is to prevent SPVs and JVs from dissolving at the end of a development and thereby avoiding liability for any claims that may crop up after dissolution because they no longer exist as a company. BLOs mean that these common corporate structures for property development might not be as valuable as they once were.

Piercing the corporate veil sounds…fantastical. What does that mean?

Limited companies (and some other corporate entities) are their own legal entity, so directors and managers and all the people of the company have their personal assets protected in the event a claim is brought against the company (there are a few exclusions but we won’t go into that here). This ‘veil’ of corporate personality is a legal device aimed to facilitate business and protect individuals.

Therefore, if a claim is brought against a company, any damages are recovered from the company’s assets, not the personal assets of the people running it, or the people who caused or contributed to the claim. Likewise, if a company is not associated to a claim, it cannot be pursued for court for damages. So for example, I wouldn’t be able to sue unrelated Company A for Company B’s negligence, even if they had the same parent company.

‘Piercing’ that protection means that the courts go after the root cause – they will look past the ‘corporate veil’. However, it is traditionally very difficult – it generally requires fraud for an individual director or shareholder to be held liable for the actions of a company. And there is good reason for that – if it was easy to ‘pierce’ the veil, it simply wouldn’t be worth having in the first place.

Building Liability Orders utilise this idea to allow the courts to pursue previously ‘protected’ parties – like dissolved entities, insolvent companies, and perhaps most significantly, sister and parent companies.

Who can be claimed against?

‘Associates’ are defined as:

1. A body corporate that controls or is controlled by the body corporate that undertook the works – for example, a parent company; or
2. Two companies controlled by the same company. This may therefore include a sister company within a group structure.

Oh…no. So, am I at risk of these kinds of claims?

Currently, only the following liabilities fall under the remit of Building Liability Orders:

1. Claims under the Defective Premises Act 1972 (the ‘DPA’).
2. Claims under Section 38 of the Building Act 1984 – although that isn’t yet in force.
3. Any claims resulting from a ‘building safety risk’. This has been defined as a ‘risk to the safety of people in or about the building arising from the spread of fire or structural failure’.

So if the claim brought against you doesn’t fall under one of these categories, the courts can’t issue a BLO. However, given the current focus on building quality and historic fire safety issues, the scope of items 1 and 3 above is potentially wide.

As a reminder, the DPA requires the construction of dwellings to be carried out in a ‘workmanlike’ or ‘professional’ manner with the proper materials, and requires the completed dwelling to be fit for habitation. The Building Safety Act extended this somewhat, notably allowing claims for harm caused by non-compliance with Building Regulations. So, if you’re an SPV, you build a wonky dwelling with asbestos, and then dissolve the SPV, theoretically a BLO could be issued to pursue you and related companies. This also covers work done to an existing dwelling.

It is also worth noting that it is just not the company or person that commissioned the original work that can claim, but also any other person with a legal or equitable interest, such as leaseholders – the DPA gets round the need for a direct contractual relationship (which would probably be required, for example, for claims under item 3 above). The Building Safety Act also amends the limitation periods for the liabilities mentioned above. Claims under the DPA used to have a limitation period of 6 years – this has now been increased to 15 years for new claims relating to refurbishment, and 30 years for the construction of dwellings. These time periods also extend retrospectively, meaning buildings constructed as long ago as 1992 might be subject to claims.

This all sounds worrying. Is this fair?

Many have argued that BLOs are unfairly wide and risk undermining the purpose of separate corporate personality. Complicated corporate structures are built precisely to limit risk, and the absence of that protection may limit investment and in turn harm the economy. You could argue the flip side of that, however: it’s not unreasonable to require buildings to be built safely, and if BLOs put off anyone, it will be those developers who consider they are at risk of not complying with the BPA etc. That, surely, is not a bad thing?

In addition, the court can only issue a BLO where it is considered just and equitable. This will probably be decided on a case-by-case basis and there is no prescriptive test. As BLOs are a new creation, we don’t yet have any judicial guidance on how they will approach the test – but where parties have acted reasonably, or an in reality completely unrelated party is pursued on a technicality, it seems unlikely that it will be ‘just and equitable’ to issue a BLO.

What should I do?

BLOs undoubtedly extend the scope of potential liability. Because they apply retrospectively – subject to the ‘just and equitable’ test, they have also brought into play many historic projects that parties thought limitation had passed on. As to what can be done, the simple answer is not a lot. Developers and others involved in the construction and refurbishment of properties should already be doing their utmost to ensure buildings are built safely – it is only those that don’t that really need to be concerned about BLOs. Where legacy projects are concerned, where projects were perhaps built to different standards, parties should however be alive to the prospect of BLOs and consider how they might mitigate any potential exposure.

This article originally featured in December 2022’s edition of our Aggregate newsletter: to read the complete edition, click here.