Responsible actors scheme update - what does it mean for developers?

Since the tragic Grenfell fire, the Government has committed to paying out billions of pounds under the Private Sector ACM Cladding Remediation Fund, Social Sector ACM Cladding Remediation Fund, and the Building Safety Fund (the Funds) in order to rectify dangerous defective cladding in buildings over 18m.

Putting aside Michael Gove’s own admission earlier this year[1] that “faulty and ambiguous” government guidance was partly responsible for the Grenfell Tower fire (and therefore the wider cladding crisis in England and Wales), the Government’s current core focus is to recover sums paid out via the Funds through various means and secure remediation of relevant buildings over 11 metres.

More particularly, the Government has required a number of major housebuilders to sign the Building Safety Pledge and the Developer Remediation Contract that commits the signatories to repay sums paid out by the Funds, and to remediate or fund the remediation of cladding defects, for buildings they had developed in the 30 years prior to 5 April 2022.

The Government used a range of tactics to encourage sign ups to the Pledge and Developer Remediation Contract, including bringing into effect on 1 September 2022:

• Sections 126 and 127 of the Building Safety Act 2022 (the BSA) entitling the Secretary of State to establish a scheme connected with securing the safety of people in or about buildings in relation to risks arising from buildings, or improving the standard of buildings; and
• Sections 128 and 129 of the BSA entitling the Secretary of State to impose development and/or building control prohibitions in relation to prescribed persons, including by reference to non-members of the scheme established under section 126 of the BSA.

The Government is now seeking to increase the number of companies who will be required to sign up to the Developer Remediation Contract by using its powers under sections 126 and 127 of the BSA to create the Responsible Actors Scheme (the Scheme), as announced by the Government on 24 March 2023, with draft regulations to establish the Scheme published on 25 April 2023. 

Who is eligible for the Scheme (and who can be prohibited from development / building control if they fail to join)?

A person is eligible for the Scheme if they satisfy any one of the following criteria (set out in regulations 7, 8, and 9 of the draft regulations), save for registered providers of social housing (or wholly owned subsidiaries of registered providers) who are exempt from the Scheme:

Residential Property Developers

The criteria will be satisfied if:

• The person’s principal business is residential property development (with the requirement for ‘principal business’ being defined in the draft regulations as either (i) that over 50% or more of their total adjusted operating profits in the financial years ending in 2017, 2018, and 2019 were derived from the development of residential property in the United Kingdom, or (ii) it is reasonable for the Secretary of State to conclude from annual reports in respect of that same time frame that the principal business activity was the development of residential property;
• The person has been responsible for the development or refurbishment of one or more ‘relevant buildings’ (i.e. a residential building in England of at least 11m developed or refurbished between 5 April 1992 and 4 April 2022 (the ‘relevant period’)); and
  • They meet the ‘profit condition’ defined in the regulations (i.e. if their average adjusted operating profits for the financial years ending 2017, 2018, and 2019 is greater or equal to £10 million).

Buildings Eligible for Remediation Funds

The criteria will be satisfied if:

• The person has been responsible for the development or refurbishment of two or more buildings which before the date the regulations come into force were assessed as being eligible for funding from any of the Funds; and
• The person satisfies the ‘profit condition’ referred to above.

Voluntary

The criteria will be satisfied if:

• The person has been responsible for the development or refurbishment of one or more relevant buildings in the relevant period;
• At least one of these buildings would require remediation under the Developer Remediation Contract; and
• The person wishes to become a member of the Scheme.

The draft regulations explain that, in determining if a person is ‘responsible’ for the development or refurbishment of the relevant buildings, they will be treated as responsible if a group company (an associate under section 131 of the BSA) was responsible for the same, irrespective of whether or not that group company was a member of the same group at the time of the relevant development / refurbishment. 

The draft regulations also address the issue where a company has been wound up potentially to avoid needing to comply with the Scheme. In this instance, the Secretary of State can direct another company in the group be treated as eligible for the Scheme when they otherwise would not be.

Crucially, even if developers are not currently caught by the criteria, the explanatory notes[2] to the draft regulations indicate the Government’s appetite to expand the eligibility criteria in future:

“The developer self-remediation approach, and the [Scheme], is to be expanded over time to cover other developers who developed or refurbished defective 11m+ residential buildings and should pay to fix them.”[3]

What are the conditions of the Scheme?

The draft regulations specify that those who join the Scheme will be required to:

• Sign the Developer Remediation Contract and comply with their obligations under the contract.
• Identify any relevant buildings for which they are responsible which require works to remedy fire safety defects.
• Remediate and/or mitigate or pay for the remediation and/or mitigation of life critical fire safety defects in those buildings.
• Reimburse the Funds for taxpayer funded work to remediate and/or mitigate defects in those buildings.
• Provide quarterly returns to the Secretary of State, and any other documentation that the Secretary of State requires, to demonstrate compliance with the Developer Remediation Contract.

Consequences if eligible developers do not join the Scheme or do not comply with its conditions

The draft regulations detail the consequences for those persons who are eligible for the Scheme but have not become members (or their membership has later been revoked), or are controlled by an eligible non-member (all being an ‘applicable person’).  The explanatory notes to the draft regulations note that the Government considers it:

“…necessary for the effectiveness of the scheme and prohibitions to include persons under the control of the prohibited developer so that a prohibited developer cannot continue their development business through other entities which they control.”

There are therefore potentially wide-ranging consequences for various group companies if one of them is an ‘applicable person’ under the regulations. 

For those who end up on the Secretary of State’s published prohibitions list, the following will apply.

Planning Permission Prohibition

An applicable person is prohibited from carrying out ‘major developments’ (that includes providing more than 10 dwelling houses, or where the floor space is to be 1,000 square metres or more). There are exceptions to this prohibition where the development relates to critical national infrastructure, but this will be determined by the Secretary of State on a case by case basis.

Building Control Prohibition

An applicable person may not give the initial notice, building notice, apply for planning certificates, apply to amend the initial notice, apply for a completion certificate or for a certificate for unauthorised work and persons are prohibited from giving such notices and certificates to them (direct or via others), unless they are subject to one of the limited exceptions that include emergency repair work and if the development relates to critical national infrastructure. There is also an exception for works on existing occupied relevant buildings, possibly to avoid potential scenarios where an applicable person is responsible for the maintenance and repair of the building and the residents’ safety requires such works to be done which trumps the benefit of any ban on the applicable person.

Next steps

Guidance on the operation of the Scheme and to local authorities on the operation of the statutory prohibitions is expected by Summer 2023.

The final version of the regulations will presumably be finalised around that time or shortly afterwards. Developers clearly need to consider whether they or any of their group companies will be caught by the Scheme and the commercial consequences that could result if they have been responsible for developing residential buildings with fire safety issues. 

One thing is clear – the Government is seeking cash and action from those developers it considers contributed to the fire safety crisis, and is not afraid to regulate to get it.

[1] https://www.theguardian.com/uk-news/2023/jan/29/gove-admits-faulty-guidance-partly-to-blame-for-grenfell-fire

[2] https://www.legislation.gov.uk/ukdsi/2023/9780348247497/pdfs/ukdsiem_9780348247497_en.pdf

[3] Paragraph 7.6 of the Explanatory Notes