On 30 January 2023, Michael Gove and the Department of Levelling Up, Housing and Communities (DLUHC) issued the long awaited final version of the Developers’ Remediation Contract (DRC). The DRC requires developers to:
- remediate or fund the remediation of “life critical” fire safety works in buildings over 11 metres which they have developed in England over the last 30 years; and/or
- reimburse the Building Safety Fund (BSF) for the cost of life critical fire safety remedial works already funded.
The DRC is designed to protect leaseholders from having to pay for these life critical remedial works. The Government has estimated that the DRC will secure £2 billion in commitments to remediate or fund/refund the costs of life critical fire safety works in buildings over 11 metres developed in England over the past 30 years1. These commitments are in addition to the £3 billion (according to Government figures) being raised from developers over the next 10 years through the Building Safety Levy (BSL) to fund remediation works.
The BSL is available to fund works to “orphaned” buildings which are above 11m in height and need fire safety repairs, but the developer cannot be traced. Therefore, developers will have funded a whopping £5 billion for life critical fire safety remediation.
Consequences of not signing the DRC
When the final version of the DRC was issued, the DLUHC also issued a letter to developers warning that developers have until 13 March 2023 to sign the DRC, or Housing Secretary Michael Gove has said developers will “face significant consequences” including those set out below.
- Developers that refuse to sign will not be permitted to join the Responsible Actors Scheme in England, pursuant to s126-129 of the Building Safety Act 2022 potentially leading to:
- prohibitions on commencing work on developments, even where there is existing planning permission; and
- the blocking of building control approval for construction that is underway.
- Prejudicial PR: a list of developers that do not sign the DRC will be made public.
- The DLUHC will take steps to inform investors and customers of the risks arising from continuing their commercial relationships with developers who do not sign the DRC.
- The DLUHC will also review its own commercial relationships, programmes, engagement and procurement frameworks accordingly.
The Home Builders Federation, having worked with developers in negotiating the DRC with the DLUHC, has said that previous drafts of the DRC were “impossible to sign”.
Key points to note about the DRC and its consequences
- It is unclear how much information will be released by the DLUHC to the signatory developers in respect of what they are reimbursing; will there be sufficient information to progress recovery actions in an orderly manner against the supply chain?
- Where the developer of a building is a joint venture, it is left to be seen how the DLUHC will handle reimbursement or funding of life critical remedial works where only one partner is a signatory of the DRC. Will the signatory developer have to reimburse / fund the works in their entirety and later recover from its joint venture partner? Or will the signatory developer only have to commit to funding equating to its proportion of responsibility under the joint venture agreement?
- Although the DRC commits developers to reimbursing the BSF, it does not preclude third parties advancing causes of action against the developer as a result of the fire safety defects in a building.
- The role of insurance is also unclear. Given the various exclusions and restrictions placed on cover in relation to cladding and fire safety, whether developers will have insurance cover to fund their commitments under the DRC (and if so, how much) might vary dramatically.
- Section 128 of the Building Safety Act details how a developer who is not a member of the Responsible Actors Scheme may be prohibited from carrying out development in England, despite having planning permission. This section refers to all development, potentially not just residential development, so the effect of such a prohibition could be severe.
Impact of the DRC on the construction industry
The DRC represents stark consequences for some developers and the construction industry. There is also likely to be a negative impact on other governmental objectives. Fewer new homes could be built in the coming years and the levies on new buildings and funding of remedial works could lead to a contraction of the construction industry’s profits – a major contributor to the UK GDP. Additionally, less income for developers could see them reallocating their cash flow with negative consequences – for example, this could be a delay in meeting ESG targets, such as the intention to become carbon neutral within a specified time frame.
With the deadline to sign fast approaching on 13 March 2023, it will be significant to see which developers have and have not signed the DRC, and how the DRC and the repercussions of not signing play out in practice.