There are a very limited number of cases where the veil of incorporation can be pierced, probably one of the best known being where directors are liable for wrongful trading.  As part of “the biggest changes to building safety regulation in a generation” (the Government’s words), the Building Safety Act 2022 (BSA) introduced a new device to pierce the veil of incorporation in the form of a Building Liability Order (BLO) and this needs to be taken on board by developers used to the comfort of limiting their liability by use of SPVs.

The claimant needs to find a relevant liability of the developer doing the works, referred to as the developer’s SPV below.  There are three potential ones.

• Liability under section 38 of the Building Act 1984, which allows the claimant to recover damages from the developer as a consequence of their non-compliance with Building Regulations. This provision was in fact only brought into effect on 22 June 2022 and only applies to buildings constructed after that date.  The BSA increases the liability period under section 38 to 15 years beginning on the date when the offending works were carried out.
• Liability under the Defective Premises Act 1972, which allows the claimant to recover damages from the developer if a dwelling, when initially completed or when later further works on it were completed, was not fit for human habitation. This act was previously regarded as relative toothless because of its 6 year limitation period beginning on initial completion of the dwelling/further works.  However the BSA lengthened this to a 30 year limitation period for dwellings/works completed before 28 June 2022 and a 15 year limitation period for dwellings/works completed after 28 June 2922.
• Liability because of a ‘building safety risk’, which is a risk to the safety of people in or about the building arising from the spread of fire or structural failure. This is a new cause of action under the BSA, so its scope is uncertain.

The claimant can ask the High Court to make a BLO under section 130 of the BAS in relation to a relevant liability.  Two obvious questions here.

• Who else can be made liable under the BLO? It’s those companies that are associated with the developer’s SPV, who can be made jointly and severally liable for the relevant defect with them and it matters not that developer’s SPV has been dissolved.  Under section 131 of the BSA ‘associated’ means that one of them controls the other or a third body controls both of them, with ‘control’ being at least 50% of the shareholding/voting rights.

These companies are referred as a BLO target below.

• What test does the court apply in finding the BLO target liable? There’s no very useful case law on this yet so that’s an open question for the moment.

Under section 30 of the BSA the Court needs to consider it ‘just and equitable’ to grant a BLO.  This phrase was previously used in section 122(1) of the Insolvency Act 1986 in relation to Court’s discretion to order a company’s winding up.  In the context of section 122(1) the Courts have steered away from defining categories of cases in favour of looking at all the circumstances of a particular case, which would seem to apply to a BLO as well.  Common sense guidelines suggested by others in this context, which seem to make sense, are as follows.

• The BLO target specifically contracting on the basis of limiting their liability (because of agreement that they would wholly rely on insurance of cap their costs) could militate against a BLO being made.
• The purpose of a BLO is to prevent parties avoiding liability by working through SPVs, so a BLO target lays itself open to a BLO being made.
• The main aim of the BSA is to make sure that buildings are safe. So maybe a BLO is more likely to be made if the current owner can’t afford to do the works.
• The other side of this is that if the current owner is well able to afford to do the works but the BLO target is not, then maybe a Court would be less inclined to grant a BLO, particularly if the BLO target is already exposed to claims under the BSA from other parties.
• The above are guesses and more finessed detail comes out of one of the very few cases on this, Wilmott Dixon -v- Prater and others 21 March 2024 (unreported) where the Technology and Construction Court held as follows.
  • The innocent disposal of the assets of the developer’s SPV does not prevent the granting of a BLO being just and equitable.
  • The BLO target’s having adequate PI insurance can render the granting of a BLO against them more likely.
  • A BLO target can itself apply for a BLO against other BLO targets.

So, what to do?

• An interesting lacuna in section 130 of the BSA is that only a company can be liable under a BLO. An individual cannot be made liable under it.  So perhaps the owners of developers should elect to own the developer SPV personally rather than through the medium of group/intermediate companies.  But that has wider tax and contractual consequences.
• Developers are used to a 12 year liability, they now need to get used to 15 and even 30 year liabilities. That means keeping records of projects for more time.
• Potential BLO targets will need to be insured.

However there has yet be any very useful caselaw on this, so currently the risk of being the target of a successful BLO is uncertain.

For more information please contact Chris Snodin at Chris.snodin@haroldbenjamin.com