It’s a scandal that leaseholders, through no fault of their own, have been exposed to potentially massive liabilities in relation to building defects for which obviously they were in no way responsible.
Isn’t it obvious that where buildings have been constructed unsafely, in breach of legal standards at the time, then those responsible for that work should be liable (with speedy resolution of that issue and gap funding for works in the interim), but that where the work was done to legal standards at the time we as taxpayers should pick up that burden?
In terms of arriving at a solution, has Michael Gove’s 10 January “developers must pay” announcement made things worse or will it prove to be a turning point?
We’re all guilty of swimming along in our separate lanes. I’m a planning lawyer, not a construction lawyer, property litigator or tax lawyer. But I wanted to understand the basics of what exactly is happening here, particularly since the Secretary of State was reported as threatening to use the planning system to make life more difficult for developers if they don’t agree a “fully funded plan of action”.
Since February 2021, we have known that the Residential Property Developer Tax will apply from 1 April 2022 in relation to residential property development recognised in accounting periods ending on or after that date. It will apply to companies or groups of companies undertaking UK residential property development with annual profits in excess of £25 million and is a new 4% tax on profits they make on UK residential property development. As set out in HMRC’s 27 October 2021 policy paper, “the tax forms part of the government’s Building Safety Package aiming to bring an end to unsafe cladding, provide reassurance to homeowners and support confidence in the housing market. Given the significant costs associated with the removal of unsafe cladding, the government believes it is right to seek a fair contribution from the largest developers in the residential property development sector to help fund it.” The Government’s aim is to raise £2bn of revenue over a ten year period.
We have also known that the Building Safety Bill is currently going through the House of Lords. Clause 57 of the Bill would enable the Secretary of State to impose a building safety levy “for the purpose of meeting any building safety expenditure”. As explained in a November 2021 DLUHC building safety levy factsheet:
“This is a new levy on developers. In addition to the new Residential Property Developer Tax (which will tax the profits of larger developers for at least 10 years), the levy will contribute towards fixing historical fire safety defects, including unsafe cladding.
We will establish three regulatory “Gateways” at key stages in design and construction, and introduce new requirements during construction, that will apply to higher-risk buildings:
· Planning Gateway one – at the planning application stage
· Gateway two – before building work starts
· Gateway three – when building work is completed
These are stop/go decision points that must be passed before a development can proceed to the next stage, strengthening regulatory oversight of design and construction. At Gateway two, construction cannot begin until the Building Safety Regulator approves the building control application.
There will be sanctions for failure to pay the levy which will be defined in regulations. This will result in the Gateway two application not being approved by the Building Safety Regulator.”
“The levy will apply to developments within scope of the Gateway 2 regulatory process, unless otherwise excluded. That means residential buildings or care homes over 18m or 7 storeys – but subject to exclusions, which we are consulting on.”
Consultation has been carried out as to the design of the levy but we have been waiting for the Government’s response and the quantum of the levy has not yet been determined.
The Secretary of State has been faced with the dilemma of how to relieve leaseholders from their unjustified burden at as little cost to the public purse as possible, presumably recognising that the building safety levy is not going to be able to achieve anything like what is needed .
It was revealed via a 7 January 2022 tweet from the BBC’s Lewis Goodall that Michael Gove had sought clearance from the Treasury “to make a statement resetting the Government’s approach to building safety ahead of Commons Report Stage of the Building Safety Bill”.
The tweet included a screenshot of the response from HM Treasury which authorises DLUHC to seek to secure £4bn funding from developers:
“You may use a high-level “threat” of tax or legal solutions in discussions with developers as a means of obtaining voluntary contributions from them.”
“…the taxpayer should not be on the hook for further costs of remediation”.
“DLUHC budgets are a backstop for funding these proposals (in full i.e. the £4bn if required) should sufficient funds not be raised from industry. You must prioritise building safety oversupply”.
“Lenders and insurers are not included in the “polluter pays” piece – and no contributions should be sought from them”.
Formal announcements were then made by the Secretary of State in the form of:
• a press statement, Government forces developers to fix cladding crisis (DLUHC, 10 January 2022)
“Mr Gove has today written to industry giving them a deadline of early March to agree a fully funded plan of action including remediating unsafe cladding on 11-18 metre buildings, currently estimated to be £4 billion.
He warns he will take all steps necessary to make this happen, including restricting access to government funding and future procurements, the use of planning powers and the pursuit of companies through the courts. He adds that if industry fails to take responsibility, the government will if necessary impose a solution in law.”
• The “Dear Residential Property Developer Industry” letter referred to in the announcement:
“I am sure you are as committed as I am to fixing a broken system. I want to work with you to deliver the programme I have set out. But I must be clear, I am prepared to take all steps necessary to make this happen, including restricting access to government funding and future procurements, the use of planning powers, the pursuit of companies through the courts and – if the industry fails to take responsibility in the way that I have set out – the imposition of a solution in law if needs be.”
• A statement to the House of Commons “…we will press ahead with the building safety fund, adapting it so that it is consistent with our proportionate approach. We will now set a higher expectation that developers must fix their own buildings, and we will give leaseholders more information at every stage of the process.”
Note the references in the announcement and letter to “the use of planning powers”. Remember that reference in the Treasury letter to high-level threats?
Tory cladding shift leaves relations with UK developers in tatters (FT, 18 January 2022)
On 20 January the Secretary of State met with “senior executives from 20 building firms” but according to the Guardian:
“ Stuart Baseley, the executive chairman of the Home Builders Federation, said the industry lobby group had made its position clear at the meeting and would continue to engage constructively with the government. “We absolutely agree that leaseholders should not have to pay to remediate buildings. However we firmly believe that any further solutions must be proportionate.”
He said the bill should be shared with “other companies, sectors and organisations”, including “freeholders and the materials providers who designed, tested and sold materials that developers purchased in good faith”.
“As we made clear to the government, we do not believe it should fall to responsible UK housebuilders to fund the remediation of buildings built by foreign companies, developers no longer trading, or other parties.”
Another piece, Others must help pay for cladding work, developers tell Gove following talks (Inside Housing, 21 January 2022) quotes Gove:
“We have made a start through the residential property developer tax and the building safety levy, both announced last February, but will now go further. I will today write to developers to convene a meeting in the next few weeks, and I will report back to the House before Easter. We will give them the chance to do the right thing. I hope that they will take it. I can confirm to the House today that if they do not, we will impose a solution on them, if necessary, in law.”
In the meantime, the House of Commons Levelling Up, Housing and Communities Committee announced an inquiry into building safety funding on 19 January 2022, with this statement from chair Clive Betts:
“The Secretary of State’s announcements on 10 January were a welcome step towards finally addressing the question of meeting the costs of making residential blocks safe rather than dumping the burden on flat-owners. Leaseholders should not be liable for the costs of removing hazardous cladding from their buildings nor the additional work necessary to make their flats safe.
“In our new inquiry, we want to examine the effectiveness and impact of the Government’s planned measures to make developers and industry pay. We also wish to scrutinise whether the Secretary of State’s approach goes far enough to finally fix this crisis and examine what the funding arrangement to be agreed with industry should look like. We will also want to examine the risk to the Department’s budget, particularly around social housing, if it is not able to secure sufficient funds from industry.”
The public evidence sessions for this inquiry are scheduled take place shortly and will conclude ahead of the Secretary of State’s planned report back to the House of Commons before Easter.”
How is all this going to play out? Who knows. If the development industry (a ridiculously loose term) doesn’t reach agreement with DLUHC, what really could we see in terms of the impacts on planning processes? Of course neither in law nor in practice could the Secretary of State discriminate in planning decision-making against any specific companies holding out from a deal but surely it will influence the priority or not that he gives to measures to increase housing supply by way of planning reform and/or his inclination or not to intervene with authorities where plan making has again stalled and surely it will influence the level at which the building safety levy is set, discriminating hugely against those bringing forward development proposals as against those companies which are responsible for past failings.
No-one should be under any illusion that these issues are easy. Is a “Dear Residential Property Developer Industry” letter accompanied by threats, in order to extract money from companies regardless of culpability, really the answer? We shall find out soon enough.
Meanwhile, this week’s clubhouse Planning Law Unplanned session is entitled “What do we mean by “digitising planning”? Possible futures”. We have five amazing guests: Euan Mills (digital planning lead, DLUHC), Graham Stallwood (director of planning, Planning Inspectorate), Mary Elkington, director, Figura Planning), Stefan Webb (place director, FutureGov) and Shelly Rouse, principal consultant, Planning Advisory Service). Join the app and event here.
Simon Ricketts, 21 January 2022
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