The Building Safety Act 2022 – Considerations for Real Estate Lenders

As with any major new piece of legislation which impacts upon the real estate lending sector, the market tends to find a way of translating those legislative changes into the relevant contractual documentation, and a standard market practice eventually emerges. The same is true of the Building Safety Act 2022 (BSA), which is the most important piece of legislation to impact on the construction sector in decades. Since the BSA first came into force on 1 April 2023, real estate lenders have slowly started to grapple with the new provisions in their loan documentation, with the BSA having the potential to impact on a number of key areas within loan documents – including on conditions precedent and subsequent, on representations, warranties and undertakings, as well as on transaction timelines and drawdown milestones.

For those unfamiliar with the background to, and detail of, the BSA, or those in need of a reminder, we would draw your attention to the many articles included in our Building and Fire Safety Hub. The BSA first came into force on 1 April 2023, and since then a suite of secondary legislation has gradually implemented the key requirements of the BSA. The new regulatory regime for ‘higher-risk buildings’ came into force on 1 October 2023 and from that date the Building Safety Regulator became the building control authority for higher-risk buildings, subject to transitional arrangements. These transitional arrangements ended on 6 April 2024.

Hot on the heels of the end of this transitional period, the Loan Market Association (LMA), the industry body of the syndicated loan market in Europe, has helpfully now published its inaugural guidance note (LMA Guidance Note) on how loan documentation used in the real estate lending sector should be amended to reflect the changes introduced by the BSA.

Those familiar with the LMA’s suite of loan documentation will be aware of the LMA’s recommended form of ‘real estate finance development facility agreement’. Whilst the LMA Guidance Note focusses primarily on recommended changes to this document, it is important to note that many of the suggested changes apply equally to the LMA’s recommended form of ‘real estate finance investment loan facility agreement’.  The provisions of the BSA apply not only to the design and construction phase of a project, but also to the occupation and management phase. There are therefore provisions of the ‘real estate finance investment loan facility agreement’ that may need to be considered when a lender is advancing a loan secured on an existing ‘higher-risk building’. Further, parts of the BSA has implications for all buildings, not just higher risk buildings.

LMA Guidance

The extent to which the BSA will apply to any real estate financing, whether it is a development financing or an investment financing, will be fact specific; an assessment will need to be made by the parties based on the facts and circumstances of the particular transaction. The LMA Guidance acknowledges this, but also highlights that the LMA has become aware that some law firms are adding to their precedent REF facility agreements one or more undertakings generally stating that the borrower must comply with its obligations under the BSA. The LMA considers such undertakings unnecessary on the basis that “the obligation to comply with the BSA is already covered by the compliance with laws and the authorisations undertakings in [the LMA real estate finance investment/development facility agreement’] (please see clauses 22.2 and 22.1, respectively).”

We are inclined to disagree with this approach.

Whilst it is technically correct, and a failure to comply with any particular provision of the BSA will constitute a failure to comply with the general ‘Authorisations’ and ‘Compliance with Laws’ undertakings, an undertaking is a positive obligation which is intended to shape the behaviour of a borrower; prevention is better than cure and in our view, it is much better to make specific reference to a borrower’s positive obligations to comply with the provisions of the BSA so as to spell out to borrowers precisely what the lender’s expectations are.

Notwithstanding the above approach, the LMA Guidance does identify three areas where it considers that changes to the LMA form of facility agreement should be considered:

• Addition of BSA-specific conditions precedent (or conditions subsequent)
  It is recommended that specific conditions precedent are included that reflect the additional due diligence required where the provisions of the BSA apply. Examples of conditions precedent that the LMA envisages should be added include the provision of evidence confirming that the building has been registered with the Building Safety Regulator and the provision of a copy of a building control completion certificate.
• Definition of Practical Completion
  If it is determined that the property being developed, or which has been developed, is a higher-risk building, the definition of ‘Practical Completion’ should be amended to take into account the additional requirements that are to be satisfied under the BSA in order for the property to be able to be used for its designated purpose. The LMA Guidance recommends that this definition should make specific reference to the date on which “the building has been registered with the Building Safety Regulator (as defined in the Building Safety Act 2022) and a building control completion certificate in respect of it has been issued by the Building Safety Regulator”.
• Addition of new Information Undertakings
  The BSA places a legal duty on duty holders and ‘Accountable Persons’ (as defined in the BSA) of buildings in scope of the BSA to create and maintain a ‘golden thread’, in digital format, throughout a building’s life cycle. The golden thread is both (1) the information about a building that allows someone to understand that building and keep it safe, and (2) the management of that information to ensure that it is accurate, up to date and easily understandable and can be accessed by those who need it. The golden thread includes the information and documents required by the new regime for higher-risk buildings introduced by the BSA (for example, gateways, registration, certification, safety case, mandatory occurrence reporting and information to support residents’ engagement). Whilst the ‘Compliance with Law’ undertaking referred to above, and contained with the LMA’s existing suite of recommended loan documentation, will require the borrower to maintain the golden thread, alongside this undertaking it would be prudent for the lender to consider whether specific undertakings should be added requiring the borrower to share (some of) the golden thread information throughout the loan term. 

Despite the recommendations highlighted in the LMA Guidance, the LMA does not, at this stage, propose to update its suite of recommended real estate finance loan documentation. They acknowledge that there is not yet a market standard approach to BSA-related provisions but will review developments in six to nine months time to see if a market standard has emerged.

Additional considerations

Aside from the three areas above which are highlighted in the LMA Guidance, we consider that other questions should be considered on a case by case basis depending on the nature of the transaction and building in question, and the loan documentation tailored accordingly. These include considering whether development ‘milestones’ should be introduced which take into account the specific requirements of the BSA, whether an undertaking should be added not to commence construction until Gateway 2 (building control approval) has been complied with, whether an express undertaking should be included to register the building with the Building Safety Regulator, whether an express obligation should be imposed on the borrower to apply for a building control completion certificate within the requisite timeframe, whether the borrower be placed under an express obligation not to occupy until a completion certificate has been granted and whether, for investment loan facilities relating to completed buildings which fall within the ambit of the BSA, adaptations of any of the above undertakings should be considered.

For existing financings where the loan documentation is already in place and does not include any ‘BSA-specific’ drafting, it may be necessary to simply rely upon the general ‘Compliance with Laws’ and ‘Authorisations’ undertakings already contained in the documentation. Lenders should, however, consider in the course of any ‘amendment and restatement’ exercise introducing BSA-specific provisions which address some of the issues highlighted in this article.

If you have any queries about the contents of this article, please do not hesitate to contact James Walton or your usual Charles Russell Speechlys contact.