Who does this apply to?
These Regulations apply to businesses which operate as building owners and landlords, and to developers. The protections covered apply to leaseholders of qualifying leases.
When did it change?
These Regulations came into force on 9 February 2023.
What does it mean?
This Statutory Instrument uses powers in the Building Safety Act 2022 (the Act) to make amendments to regulation 3 of the Building Safety (Leaseholder Protections) (England) Regulations 2022 (the 2022 Regulations), which relates to associated persons for the purpose of the landlord group to which the contribution condition in paragraph 3 of Schedule 8 to the Act applies (see below).
It also amends the list of persons who are not to be considered associated with the relevant landlord for the purposes of paragraph 3 of Schedule 8 of the Act.
The effect of this is that a landlord will now be considered to be associated with the relevant landlord for the purpose of establishing whether the landlord met the contribution condition in the circumstances set out in sections 121(5)(b) and 121(6)(a) of the Act.
The intention of regulation 3 of the 2022 Regulations was to exclude directors in common as it was deemed inappropriate for the calculation of the net worth of a landlord group. However, in doing so, parent and sister companies unintentionally became excluded. Parent companies refers to those companies which have a controlling interest in one or more smaller company and sister companies are subsidiary companies owned by the same parent company. This Instrument seeks to rectify this unintentional error and ensure that the net worth of a landlord group includes parent and sister companies, for the purposes of determining whether or not they meet the contribution condition in Schedule 8.
Paragraph 3 of Schedule 8
Part 5 of, and Schedule 8 to, the Act provide that, in many cases, a leaseholder may not be required to pay a service charge to cover the cost of remediating historical safety defects in a relevant building. Paragraph 3 of Schedule 8 to the Act gives the Secretary of State the power to make regulations to determine whether the landlord group met the contribution condition based on the net worth of the landlord group and for the landlord to calculate the value of a qualifying lease under paragraph 6 of Schedule 8.
Background
The leaseholder protection provisions in the Building Safety Act 2022 came into force on 28 June 2022, with the accompanying regulations coming into force on 20 and 21 July 2022. Under the Act, building owners and landlords who are, or are connected to, the developer must fix all historical safety defects in buildings they own that are above 11 metres or five storeys. In addition, landlords whose landlord group had a net worth of more than £2 million per relevant building on 14 February 2022 (“the contribution condition”) must not pass on costs for historical safety remediation to qualifying leaseholders. The regulations set out how to calculate a landlord group’s net worth, along with what are considered as associated persons of the landlord.
What’s changed?
Regulation 3(2) in the 2022 Regulations makes an amendment to Section 121 of the Building Safety Act 2022 in relation to the definition of associated persons for the contribution condition. The intention of regulation 3(2) was to exclude directors in common, as this provision had the unintended consequence of making liable under the Act, unrelated companies that shared non-executive directors.
As the Act passed through different parliamentary stages and new clauses were added, numbering changed. Unfortunately, as the 2022 Regulations were drafted at the same time as the Bill clauses, an accidental numbering error occurred in regulation 3(2). This had the unintended consequence of excluding parent and sister companies from being considered as associated with the landlord, and thus their net worth would not be taken into account when considering the landlord group’s net worth.
This Instrument amends regulation 3(2) of the 2022 Regulations by removing two of the modifications so that a person would be associated with the relevant landlord for the purposes of paragraph 3 in the circumstances set out in sections 121(5)(b) and 121(6)(a) of the Act. This reinstates parent and sister companies as associated persons for the purpose of the contribution condition in paragraph 3 of Schedule 8 to the Act, in line with the original policy intent and that published in guidance on gov.uk.
This amendment will mean that a greater number of landlord groups will meet the contribution condition and therefore have to cover the capped remediation costs which could have otherwise been passed on to qualifying leaseholders where historical safety defects were discovered in a relevant building. Consequently, a greater number of leaseholders will be protected from paying anything at all towards remediation of their blocks, in line with the broad objectives of the Act.
It also means that, for the purpose of the contribution condition in paragraph 3 of Schedule 8 to the Act, the definition of landlord group will include body corporates where (i) one is in control of the other, (ii) a third party controls both, and (iii) where a body corporate is entitled to or possesses at least half of the issued share capital of the company. This reflects the original policy intent.
Over time, the original error which narrowed the scope of a landlord group for the purpose of the contribution condition will be rectified in many cases and more leaseholders will be protected from historical safety remediation costs, as was the original policy intention of the contribution condition. As a consequence, such landlords will no longer be able to pass on costs of historical safety remediation to qualifying leaseholders.
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