The UK Building Safety Act 2022 and its impact on M&A

The creation of the UK Building Safety Act 2022 (“BSA”)

The Grenfell Tower tragedy was an industry defining event that demanded a fresh look at the way in which the construction industry operates. In this article, we take a look at the BSA and its impact on M&A transactions. The repercussions of external walls and cladding failing to comply with safety standards had consequences that nobody wishes to see again.

The final report of Dame Hackitt proposed a new regulatory framework aiming to:

• create a simpler and more effective regime for driving building safety;
• provide stronger oversight on duty-holders with incentives for the right behaviours and effective sanctions for poor performance; and
• reassert the role of residents in being able to seek legal redress for unsafe work.

Key changes under the BSA

The BSA is one of the most extensive legal reforms the industry has seen in many years, key changes include the introduction of:

• regulatory reform for higher risk buildings, creating new roles and additional duties and responsibilities, as well as introducing a number of registration and procedural requirements during a building’s construction and occupation (including the provision and retention of key information);

• the extension of existing rights of recourse for dwellings that are unfit for habitation;

• new powers granted to the courts to impose orders requiring remediation works and/or financial contributions for mid-rise buildings that pose a building safety risk;

• wider classification of liable parties where the courts have the power to “pierce the corporate veil”, so that companies associated with the original party can be made liable if rights can no longer be enforced against the original party (for example if they are insolvent, or a special purpose vehicle with no other assets); and

• extended limitation periods, the BSA has extended limitation periods for existing building safety defects prior to 28 June 2022 which have a limitation period of 30 years, and building safety defects thereafter have a 15 year limitation period.

All of this is backed up with the creation of the new Building Safety Regulator in the Health & Safety Executive to oversee compliance.

Impact on M&A

Sellers preparing for sale

Sellers preparing for a transaction should expect questions on the BSA to be asked by potential buyers through the due diligence process and must assess the impact of the BSA in advance. We recommend as part of the preparatory work for a sale that the business considers not only whether they own properties or supply products which are caught by the BSA, but also how they will practically implement and assess the cultural changes and staged implementation of regulations which the BSA foresees.

Any product liability claims are likely to be a key focus of a buyer’s diligence, and a strategy may be required as to how any such claims are to be presented in the process.

Extension of the limitation periods means that loss of records to evidence compliance and changes of ownership could make the provision of information more challenging. The preservation of data is going to be increasingly important, both in managing claims, and also in fulfilling regulatory registration and management duties. Buyer’s and their advisers will want to have confidence that they are inheriting a compliant position or be able to quantify the risk of any non-compliance.

It will be necessary for those in the industry to review their document retention policies and to consider investment in a suitable electronic document storage and retrieval system.

Buy-side diligence and approach

We expect to see a renewed focus through the due diligence process to identify any BSA issues prior to completion. Alongside a legal questionnaire, additional operational due diligence may be required, and there will be a particular focus on claims diligence, potentially via specialist insurance diligence, alongside the legal review of compliance. It should be noted however that the availability of insurance may be limited, as fire safety issues are often excluded or only available as an aggregate sum under current policies.

The effects of the BSA are also likely to be seen in the recourse sought against sellers. This may take the form of a wider scope of compliance warranties to drive disclosure, but also through indemnities and other specific protection (such as longer limitation periods in respect of any identified BSA issues) in transaction documents.

Insurance

Product liability matters are typically carved out of a warranty and indemnity insurance policy and we expect further interest in separate product liability insurance policies and a greater focus on operational insurance diligence.

The subsequent discovery of widespread building safety issues after Grenfell means almost all professional indemnity insurance policies limit or exclude cover for fire safety defects.

Stay up-to-date

The BSA provides a clear framework of the cultural changes that will take place across the industry as a whole. The legislation is multi-phase and new provisions continue to come into force. Those looking to acquire businesses with residential and/or mixed use portfolios will need to keep a watching brief to ensure that their M&A strategy and diligence exercises keep ahead of any further changes in the legislation.