‘Polluter pays’: cladding remediation update

On 4 November 2024, the National Audit Office (NAO) published its report on the Government’s programme for remediating dangerous cladding[1]. Investigations that followed the Grenfell Tower fire revealed a significant number of unsafe buildings throughout England. The Ministry of Housing, Communities & Local Government (MHCLG), the Government department behind the remediation of unsafe buildings, launched a programme to resolve matters.

On launching its remediation programme, MHCLG estimated remediation works would be completed by 2035. According to the NAO’s recent report however, progress is falling behind this estimate. Remediation works need to speed up significantly to meet the 2035 estimate which will likely lead to knock-on costs for developers, freeholders and sub-contractors.

Progress of Remediation

MHCLG’s original programme targeted multi-occupancy residential tower blocks over 18 metres in height. It quickly became clear that the scale of the problem was more significant than initially understood and the programme was subsequently expanded to include all multi-occupancy buildings over 11 metres in height. Whilst progress has been made (remediation works on most targeted buildings over 18 metres in height with the more dangerous forms of cladding are now complete or nearing completion), overall remediation work is falling behind the 2035 estimate.

MHCLG estimates there are between 9,000 and 12,000 buildings over 11 metres in height that require remediation, and according to the NAO, 4,771 of those buildings have been identified. A significant issue for identification is that while registration of higher risk buildings is mandatory under the enhanced regime introduced by the Building Safety Act (BSA), registration for buildings 11-18 metres in height is not. Of the 4,771 buildings in MHCLG’s portfolio, remediation has been completed on 1,392 (approximately a third), started on 985, and not yet started on 2,394. Taking into account buildings which have yet to be identified, work has been completed on only 12-16% of MHCLG’s estimated total scope.

At the current rate of works, remediation will need to continue beyond MHCLG’s 2035 estimate. To mitigate this risk, the Government has set out a remediation acceleration plan, ramping up work with local authorities and regulators to speed up remediation[2]. This is likely to have a knock-on effect on the cost of remediation for developers, freeholders and their supply chain.

The NAO has called for the Government to confirm a target date for remediation to be completed and to increase transparency on remediation performance[3]. Whilst the BSA means that leaseholders do not have to pay for remediation costs, many have faced increased service charges due to higher insurance premiums. Without published milestones, the NAO argue that residents have no idea when their homes will be safe. Whether a confirmed target date will be published or how greater remediation transparency will materialise is yet to be seen.

The Costs of Remediation

Under the ‘polluter pays’ principle, the costs of remediation should be met by those responsible, i.e. freeholders and developers. The Government’s aim is to relieve pressure on the public purse and to protect leaseholders from paying to remediate a problem not of their own making. MHCLG currently estimates that £16.6bn will be required to fix all unsafe cladding on buildings over 11 metres in height in England. The Government has capped taxpayer contributions at £5.1bn over the lifetime of remediation programmes – the MHCLG expects to provide a total of £9.1bn, leaving a £7.5bn shortfall that needs to be made up by developers, private owners or social housing providers.

To keep the taxpayer contributions within the cap, MHCLG plans to recoup around £3.4bn from a new Building Safety Levy (BSL). It is unclear how the BSL will work in practice; if the Labour government retains the position of its Conservative predecessor, developers of residential buildings, regardless of building height, will have to pay the BSL[4]. The Government has confirmed that the levy will be payable in one tranche, and a building control completion certificate cannot be issued if payment is not completed. The BSL will be charged on a square metre basis, with varied rates across the country. Certain developments including affordable housing, NHS hospitals and facilities, and care homes will be exempt from the BSL and there will be a 50% reduction for developments built on previously developed land[5]. It is unlikely that the BSL will be introduced until autumn 2025 at the earliest.[6]

Whilst MHCLG’s proposed BSL will apply to England only, the Scottish Government has announced an intention to introduce a similar levy which it estimates will raise £30 million a year[7]. The Scottish BSL will apply to new homes built by developers for onward sale, new purpose-built accommodation, and redevelopment of existing buildings to provide accommodation. The Scottish BSL is currently in consultation phase and closes on 18 November 2024.

In addition to the BSL, MHCLG plans to recoup £700 million through refunds from developers for remediation works which the taxpayer has already funded[8]. Whether these works have already been identified and, if not, how MHCLG will identify them, is presently unclear.

As of August 2024, MHCLG has spent £2.3bn on the remediation works. With an estimated 60% of buildings yet to be identified, let alone remediated, there is a significant amount of costs still outstanding. It is likely that the Government will continue to drive for developers and freeholders to introduce a more proportionate approach to remediation to help protect taxpayer money; the issue is how this can be balanced with the need to ensure that remediation costs and liability contributions are calculated accurately.

Commentary

The NAO’s report recommends that the Government considers tougher enforcement activity to help resolve/expedite disputes and accelerate remediation if the speed of work has not picked up by the end of 2024. Swifter remediation and tougher enforcement will come at a cost to the construction industry at a time when it is already under public and press scrutiny for building safety.

Remediating cladding defects is often a complex and expensive endeavour; the cost of investigating and replacing it can be significant, and assigning liability is not straightforward. Due to the number of parties involved in designing, specifying, manufacturing and installing cladding, and given the time which may have elapsed on some of these projects, the allocation of responsibility or liability is complicated in practice and disputes are often lengthy and costly.

The drive for swift remediation works may lead to developers not having the necessary time to accurately assess the cost of remediation, leading to potential over estimation. When developers look to use the available dispute resolution processes to recover contributions from their supply chain, they may be faced with a shortfall if remediation costs are ultimately questioned or found to be unreasonable and this will place further strain on the construction industry. As a result, the industry is likely to be faced with having to juggle evidentiary issues or prolonged disputes, stalling either remediation works or the recovery of remediation costs. Overvaluation may also have a negative impact on the taxpayer as higher costs of remediation may lead to greater contribution from government funds which will eat into the £5.1bn governmental cap, further increasing the shortfall that will need to be made up by the construction industry in subsequent remediation works.

The evolving nature of the building safety landscape continues to have a significant effect upon the construction industry. If you have any questions on the content of this update or ongoing remediation process on your projects, please contact the authors or your Beale & Co lawyer.

[1] Dangerous cladding: the government’s remediation portfolio – NAO report; Dangerous cladding: the government’s remediation portfolio

[2] Response to NAO report on cladding remediation  – MHCLG in the Media

[3] Government should publish a target date for ending cladding remediation – NAO press release

[4] Building safety levy moves a step closer – GOV.UK

[5] ​​Building Safety Levy: response to consultation ​ – GOV.UK; Building Safety Levy: second consultation – GOV.UK

[6] Government should publish a target date for ending cladding remediation – NAO press release; Response to NAO report on cladding remediation  – MHCLG in the Media

[7] Scottish Building Safety Levy Consultation 26 09 24.pdf; Scottish Building Safety Levy – Taxes – gov.scot

[8] Government should publish a target date for ending cladding remediation – NAO press release