While Building Safety Act 2022 (BSA) is primarily directed at developers, landlords, and those involved in construction and building management of higher-risk buildings (HRBs), lenders, especially those focused on development finance, must now navigate a more complex landscape when considering an exit from distressed assets.
The BSA establishes several categories of “liable persons” who may be subject to obligations in respect of HRBs. These include the “client” (the person for whom the building work is carried out), the “developer” and the “accountable person” all of whom carry potential responsibility under the BSA. Additionally, an “associate” (a person or entity connected to a developer or landlord) may be held liable under Building Liability Orders (BLOs) or Remediation Contribution Orders (RCOs).
For lenders, the risk arises not from the lending itself, but from the actions that may need to be taken if a loan defaults. The choice of enforcement strategy therefore becomes critical in determining whether a lender could become exposed to these liabilities.
Mitigating Risk: Traditional Insolvency Processes
Enforcement of security through insolvency processes, such as administration or receivership, offer a degree of protection because the appointed insolvency practitioner acts as the agent of the borrower, not the lender.
In administration, the borrower remains intact and continues to bear its own liabilities, the administrator must comply with certain procedural obligations under the BSA, such as notifying the Building Safety Regulator, but the administrator (and, in turn, the lender) is not personally liable for the borrower’s compliance.
Similarly, the appointment of a Law of Property Act (LPA) or fixed charge receiver is a well-established enforcement route that similarly shields lenders from direct liability, as long as the lender avoids taking possession or assuming control, the risk of being classified as a “client,” “developer,” or “accountable person” remains low.
These insolvency-based enforcement strategies remain attractive because they allow lenders to recover value from distressed assets without stepping into roles that carry regulatory obligations.
Thinking Twice – Higher-Risk Approaches
In contrast, other enforcement strategies carry higher risk for lenders under the BSA. Chief among these is taking possession of the property as mortgagee in possession. In doing so, the lender effectively steps into the shoes of the borrower and assumes responsibility for the management, or development, of the property. This can trigger classification as a “client” under the Building Regulations, or as an “accountable person” if the lender holds the legal estate in possession of the common parts of an HRB.
The implications are serious. For example, once responsibility is taken for a HRB, the lender may be required to comply with the BSA’s gateway regime, maintain the “golden thread” of information, and satisfy the Building Safety Regulator’s requirements. These obligations are ongoing and cannot be easily relinquished. Moreover, the lender may become liable, as an associate, under a BLO or RCO.
Another high-risk approach is the appropriation of shares in a borrower. Whilst this may seem like a clean enforcement mechanism, it can result in the lender acquiring control of the borrower and becoming an “associate” under the BSA. Once classified as an associate, the lender may be held liable for building safety defects, even if it was not involved in the original development.
Lenders should think-twice about these higher-risk approaches and only after careful legal and commercial analysis. Where enforcement through possession or control is contemplated, lenders must consider the full spectrum of BSA liabilities and ensure that appropriate protections are put in place.
The challenge of Step-In Rights
For those lenders involved in more structured lending solutions, the challenges are likely to be even more acute. These lenders often operate in complex capital stacks (e.g. mezzanine, preferred equity or A/B positions) and may have preferential contractual rights over other lenders lower in the capital stack to step into a development in order to protect their investment. While these rights are commercially valuable, they now carry increased risk under the BSA.
Stepping into a development, whether through contractual rights or share enforcement, can result in the enforcing lender becoming the de facto “developer” bringing with it the potential obligations and liabilities highlighted above.
In these scenarios, a lender must think carefully about its exit strategy and whether the potential recovery justifies the exposure. It may be that alternative enforcement routes, such as administration or receivership, could achieve the same outcome with less risk.
Where direct step-in is necessary, lenders should ensure that the contractual and structural framework for step-in minimises exposure as much as possible.
The “Just and Reasonable” Safeguard?
A mitigating factor for lenders may be the “just and reasonable” test, which gives the courts discretion in imposing BLOs and RCOs. While the definition of “associate” under the BSA remains broad the court must be satisfied that imposing liability on an “associate” is just and reasonable in the circumstances. Recent case law suggests that the courts are reluctant to extend liability to persons who are only remotely connected to the development or management of a building. For genuinely arms’-length lenders, who have not exercised control or influence over a development, this test should provide a degree of protection. However, it is not a guarantee, and without further clarification from the courts lenders should still exercise caution.
Conclusion
The BSA has materially upped the enforcement risk for lenders to HRBs. The choice of enforcement strategy will determine whether a lender becomes exposed to BSA liabilities.
By favouring insolvency practitioner led enforcement routes, such as administration and receivership, lenders may be able mitigate risk and preserve value. However, for those contemplating step-in, possession or exercise of other controls to build out a scheme as a means of exit, the path must be planned carefully and with full awareness of the potential regulatory consequences.
In this new environment, enforcement strategy is no longer just about recovery, it’s about risk management, regulatory compliance, and reputational protection. Lenders will need to adapt, plan ahead, and ensure that their enforcement decisions are informed by a clear understanding of the BSA’s reach.
This article has been written by James Molland of Eversheds Sutherland and Andrew Whittaker of Precede Capital Partners.
