On 9 May 2019 Communities Secretary, James Brokenshire MP, announced a £200 million fund would be made available to remove and replace unsafe aluminium composite material cladding (ACM) from around 170 privately owned high-rise buildings. This follows the £400 million provided to councils and housing associations last summer.
In order to receive any funds the government has said it will require the building owners to take reasonable steps to recover the costs from those responsible for the presence of the unsafe cladding.
On 18 July a “Full Fund Application Guidance” was issued. This confirmed money would be available to owners, head leaseholders or management companies with primary responsibility for repair of buildings that have combustible cladding and where there are leaseholders in situ. Where there are no leaseholders funding may still be available but will be subject to State Aid rules and capped at €200,000.
Applicants will be asked what steps have been and are being taken to recover remedial work costs from “those responsible”.
If any money is recovered the government will expect applicants to pay back any money received, up to the amount provided through the fund and only in relation to the cost of replacing unsafe cladding.
The government has not ruled out seeking an assignment of relevant rights of action where it considers it would be appropriate to do so and pursuing “those responsible” itself.
Further details can be found here.
What does “taking reasonable steps to recover” mean in practice?
The guidance states that building owners must actively identify and pursue all reasonable claims against those involved in the original cladding installations, and to pursue insurance and warranty claims where possible.
“Those involved” could include, for example, building contractors, architects, installers, manufacturers, specialist sub-contractors and insurers.
If a contract is in place there will generally be an obligation on the relevant contractor or consultant to:
(a) Comply with all relevant statutory requirements including Building Regulations;
(b) Comply with good industry practice;
(c) Carry out the work with all due care and skill;
(d) Ensure new-builds comply with National House Building Council (NHBC) or equivalent NHBC Technical Requirements;
(e) Comply with any applicable manufacturer’s guidance on use/installation.
In addition, there is usually a prohibition against the use of ‘deleterious materials’ (unsafe materials).
If cladding was installed in breach of any of the above there may be a contractual liability for whichever contracting party took the risk of compliance.
If there is no contract or no contractual documentation available it may be possible to say, as a matter of fact, that there is no reasonable prospect of recovery (given the difficulties of pursuing other claims outline below) but building owners should consider the implied contractual terms that exist in any contract (such as the duty to exercise skill and care in carrying out services) before dismissing a claim out of hand.
Negligence?
If there is no contract in place building owner could consider whether “those responsible” might have owed a duty of care to carry out works with reasonable care and skill; however, any claim is likely to be difficult because of the principle of “pure economic loss”. This is a rule that if there is no physical damage i.e. the cladding is a defect but has not caused damage to any other part of the building, separate buildings or to persons, any loss is only an economic loss rather than a physical loss, and pure economic loss is usually excluded from negligence claims because it is too remote, and it is therefore unfair to make someone pay for something that was not foreseeable. Subject to very limited exceptions, the only way to recover pure economic loss is under a contract.
Approval?
If the cladding was inspected and approved but should not have been, the inspector may have breached its duty of care but such cases are difficult to pursue.
Two recent judgments, Zagora Management Ltd and others v Zurich Insurance plc and others and Lessees and Management Company of Herons Court v Heronslea Ltd and others have illustrated the problems faced by claimants against approved inspectors. In Zagora, even though the approved inspector had known of serious concerns with the development and compliance with the regulations, particularly as regards fire safety, the misrepresentations made in the certification were not relied on and / or were too remote, and therefore the claims failed. In Lessees of Herons Court, a claim against NHBC under the Defective Premises Act (DPA), failed because the court found the DPA did not apply to inspection services.
Insurance
Notwithstanding the difficulties in Zagora, the leaseholders were granted relief because they were allowed to rely on their new home warranty, and therefore to claim against their building guarantee, up to the capped policy limit. The fire safety risks were seen as a “present or imminent danger” to the residents / leaseholders, and it was therefore appropriate for the building owners to carry out major and expensive remedial works and for the building warranty insurer to pay the leaseholder portion of these works.
NHBC has also recently agreed to pay for remedial works at a site in Greenwich, having concluded that there was a failure to comply with building regulations at the time of construction.
It is worth noting that the government has said it wants to explore options to increase the prevalence of insurance and warranties, as part of the Hackitt reforms.
Qualification for funding
It would seem that, to qualify for funding, building owners will at the very least have to consider:
(a) all their contractual and insurance relationships and, to a lesser extent, the approvals given for the cladding;
(b) whether there has been a breach of any contractual terms;
(c) whether there has been any negligent action or inaction that overcomes hurdles of pure economic loss; and/ or
(d) whether there is any building warranty that could be relied on.