Providing for uncertainty introduced by the Building Safety Act 2022 in conditional sale contracts

The Chancellor’s Autumn Budget announced the government’s commitment to build 1.5 million homes over the course of this Parliament. To achieve this, the Chancellor committed £5 billion to delivering new housing, with a sizeable amount of this, £500 million, going towards the Affordable Homes Programme. In acknowledgement of the need for reform of the planning system, the Chancellor announced £46 million of additional funding to aid the recruitment and training of staff into local planning authorities. 

Against this backdrop of greater investment and a commitment to tackling the housing shortage, developers are facing many unknowns when taking on housing development projects, particularly when it comes to timeframes and costs. The Act, it’s gateway regime, and proposed Building Safety Levy (“the Levy”) all introduce a level of uncertainty for developers which must be considered by legal practitioners drawing up conditional sale agreements. 

The Building Safety Act 2022 (“the Act”) focuses on the structural safety and fire safety of buildings. It was enacted in response to the tragedy at Grenfell Tower in June 2017. The Act and supporting legislation[1] introduced a new gateway regime into construction projects for higher risk buildings. Where a building falls within a category of higher risk buildings, the development project will be subject to this gateway regime. In England, a building that is: (a) at least 18 meters or seven stories tall, and (b) contains at least two residential units, a care home or a hospital will be categorised as higher risk and subject to the three gateways.

Gateway one 

Also known as the planning gateway, this gateway ensures that fire safety is introduced into the design elements of a build as early as possible. Within a development’s planning application, a full fire statement must be submitted. The planning authority will then send a consultation request to the HSE (the Health and Safety Executive) for them to consider and advise upon the safety provisions designed into the project as set out in the planning application and fire statement.  

It is then for the local planning authority to consider the HSE’s advice and decide how much weight to attach to it when deciding whether to grant planning permission for the project.

As this gateway is embedded into the planning stage of a development project, its impact will likely be felt on purchase agreements for the sale of land subject to the grant of planning permission. Typically, these contracts will be drafted to make the obligation to obtain planning permission a clear condition precedent. The operation of gateway one being embedded within the planning process eradicates the need for a separate condition precedent for the completion of this first gateway. 

There are cost implications that will need to be considered. A planning application going through the gateway process requires design teams to go further to ensure fire safety is satisfactorily incorporated at this stage and is likely to require earlier involvement from related contractors. 

 It will also be necessary to factor the gateway process into projected timeframes for the sale and consider possible delays that the gateway could cause when inserting applicable longstop dates into the contract. The longstop date will need to include a buffer for delays caused by the planning gateway process, providing for scenarios where the HSE requires further information or even where the application is refused and must be resubmitted to include greater fire safety provisions within the development plan. 

Given the potential impact to project margins or viability, developers will want to ensure that any potential requirements added at this gateway are covered by the criteria for a ‘satisfactory planning permission’. 

Gateway two

Gateway two occurs before the construction stage of a project and requires that building control approval from the Building Safety Regulator (the “BSR”) is applied for and obtained before construction commences.

The BSR seeks to respond to the application for gateway two approval within twelve weeks. Construction can start once the BSR agrees and approves the building plan. Once approval is obtained any changes made to this plan must be documented within the change control log and any notifiable or major change will need to be reassessed by the BSR and their approval given to that change.

The JCT 2024 contracts have made provisions for the Building Safety Act and the new statutory obligations it places on different parties to construction contracts, however the provisions made are rudimentary. When it comes to the gateway regime, practitioners will need to go beyond the clauses within the JCT template to set out clearly which party bears responsibility for obtaining BSR approval prior to the commencement of construction, who holds the ongoing reporting responsibilities imposed by this gateway, and who is responsible for obtaining BSR approval for any subsequent changes made to the approved plan. 

The BSR has 10 days to respond to requests for approval of notifiable changes and six weeks to determine whether it approves any major changes. The BSR has extensive enforcement powers meaning it can stop work on site while it considers any changes to the approved plans. Therefore, practitioners will need to factor in resulting delays to the progress of construction and significant consideration should also be given to which party bears the risk and responsibility for such delays.

In conditional sale contracts, it will also be worth considering whether a sale should be subject to a further condition precedent incorporating satisfaction of the second gateway, in addition to obtaining planning permission. A developer may not wish to bear the risk of buying land that has obtained planning permission but then fails to satisfy gateway two and get BSR approval. It will be for parties to negotiate whether this should be a developer risk or a seller risk and then the contract should be drafted accordingly. 

Gateway three

Once building work is complete, the party commissioning the project will submit an application for a completion certificate under this final gateway, and in doing so, it must provide evidence that the building has been constructed according to the plans approved by the BSR at gateway two. This application will include evidence to show that the building is safe for occupation and evidence of ongoing management plans.

Gateway three is a hold point in the progress of the development since occupation of a high risk building cannot commence until a completion certificate is granted by the BSR. Registration of the building for occupation with the BSR includes submitting the obtained completion certificate granted under gateway three. Consequently, there is likely to be an inevitable pause between construction being finished and the building becoming occupied. It is advisable that planning for this stage should therefore start well before construction is completed on site. 

Practitioners will need to be careful when it comes to defining practical completion within contracts. Typically, upon achieving practical completion, responsibility for the site reverts from the contractor back to its employer along with insurance risk for the works. Performance bonds within the contract will generally expire on or shortly after practical completion. Practitioners will need to consider the timeframes of the gateway regime and their impact upon the practical completion mechanism within the contract. Clients will likely want to avoid the scenario where the contractor has handed back the responsibility for the as a result of achieving practical completion, and then subsequently the BSR in responding to the gateway three application requires the contractor to go back to site to remedy a fault before it will grant a completion certificate. 

Practitioners will need to consider whether they link compliance with the third gateway to the definition of practical completion. Consideration must be had for completion deadlines and the possible delays caused by the third gateway. It will be necessary to balance competing interests between the contractors and those funding the project as to who bears the risk for delays caused by this third gateway.

The Building Safety Levy

The Levy will be a tax on new residential buildings in England that will be used to fund the remediation of building safety defects. The Levy was introduced in 2021 and has been through two public consultation processes. At present, it is unknown when the Levy will come into effect or how it will interact with the existing section 106 planning obligations regime and the Community Infrastructure Levy.

Secondary legislation, not yet enacted, will set out the exact process for collecting the Levy, however it is understood that it will be collected by Local Authorities. Developers will have some flexibility about when the levy is paid but it must be paid before the completion certificate is issued or the final certificate is accepted for the development. 

The Levy falls within a group of costs associated with compliance with the Act which may impact the valuation of units. 

Conclusion

At a time where the market is set to see an injection of investment from the government for the development of property, those drafting the conditional sale contracts that underpin these developments must be careful to consider the uncertainties introduced to the project by the Act. It will be necessary for parties of these development projects to provide for these gateways within the underlying contracts in order to avoid the associated delays and risks that this new gateway regime introduces. 

Two significant unknowns will be the impact of the Act on project timeframes and the costs associated with the Act, including the Levy. Legal practitioners must be attuned to these uncertainties in order to provide for them within contracts in a way that protects their client’s position and reflects their risk tolerance.

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[1] Town and Country Planning (Development Management Procedure and S.62A Applications)(England)(Amendment) Order 2021; The Building (Higher-Risk Buildings Procedures)(England) Regulations 2023 (SI 2023/909).