The Building Safety Act and PFI Contracts – the end of the Teflon tube?

Private Finance Initiative Contracts (“PFI Contracts”) were introduced in the 1990s as a way to use private money to finance public infrastructure works.

Historically, under the PFI structure, the public authority entered into a circa 25 year contract with a private sector entity, in the form of a special purpose vehicle (”SPV”), for the financing, design, build and maintenance of the relevant project (e.g. a hospital, prison or housing). Once the construction of the project was complete, the public authority would take beneficial occupation and the SPV would provide maintenance services for the remaining fixed term. The SPV would recoup its funding of the build through yearly service charges.  Following the expiry of the fixed term, the completed building would be transferred back to the public authority.

PFI contracts pre-date a number of legislative changes in the UK, and did not anticipate the impact of the Building Safety Act 2022 (“BSA”) and its secondary legislation.  Any PFI project involving housing or any other building is covered by the new legislation.  Now the legislation relating to the BSA has come into full effect, any significant maintenance to a building as part of a PFI contract is covered by the new legislation.

There are two issues that come with this.  Firstly, who pays for compliance with the new legislation; and secondly who is going to take on the role of duty holder.

While all PFI contracts are bespoke and need to be read to understand the specific terms, typically such contracts dealt with changes in law based on whether the change was a qualifying change in law.  Irrespective of who pays for the additional cost of compliance, how does the new duty holder regime work within a PFI contractual structure?

Historically under PFI Contracts the SPV would be a shell company made up of investors, the original build contractor and the maintenance contractor.  These original parties will generally have long since exited the SPV with new investors taking a more long-term view of the financial worth of the PFI asset. The SPV doesn’t have an effective management structure, and simply passes all risk to the maintenance contractor (both soft and hard).  This concept is commonly referred to as the Teflon tube, with the SPV retaining no responsibility.

However, with the implementation of the BSA and its secondary legislation, the party acting as the “client” takes on ultimate responsibility for compliance with Building Regulations which cannot be sub-contracted.  So now the SPV is faced with having to take on the responsibility as client under the BSA together with needing to have a specific nominated representative.

So in practice the SPV needs to reconsider how it is managed.  There will need to be a specific individual as a nominated representative (in the absence of any named party, it is assumed it will be a named director of the SPV).  The SPV will be responsible for the Building Regulations Principal Designer and Principal Contractor.

If the SPV is not best placed to take on the role of Client, the parties to such contracts may consider the public authority as best suited to assume this role for the purposes of Building Regulations.

Each PFI arrangement is specific and will need to be carefully considered, but the issues arising under the BSA need to be addressed within a contractual structure not designed to readily cope with the new duties imposed on “clients”.

If you have any issues or queries regarding PFI Contracts or the Building Safety Act, please contact us.