As the pandemic persists and the disruption of the previous two years continues to impact projects, the construction industry faces a continued period of uncertainty in 2022.
The pandemic and issues around the availability of materials may continue to disrupt projects into 2022 leading to higher costs and further delays. In a statement in December 2021, the co-chairs of the Construction Leadership Council’s Product Availability working group expected that pressure on the supply chain to deliver products will return “as construction activity remains strong next year, with longer lead times and further price increases anticipated”. Additionally, the challenging professional indemnity (PI) insurance market is likely to persist into 2022 with high premiums and wide exclusions commonplace.
Get prepared for the Building Safety Bill
The Bill aims to deliver reform to the building safety system, including fundamental changes for high-rise residential buildings. The Bill was introduced into Parliament in June 2021 and will continue its passage through Parliament this year. The Government has published an outline transition plan which provides for the commencement of provisions within 12-18 months after the Act comes into force. The progress of this large and complex piece of legislation will be closely monitored as the industry prepares for the implementation of the new regulatory regime.
Cladding crisis – who will pay?
There are several measures the government intends to implement to address the cost of fixing historical fire safety defects, including removing unsafe cladding:
- From April 2022, the Residential Property Developer Tax will apply to profits that companies and corporate groups derive from UK residential property development. The tax will be charged at 4% on profits exceeding an annual allowance. The tax applies to profits arising in accounting periods ending on or after 1 April 2022, with profits from periods straddling that date being apportioned.
- The Building Safety Bill also provides for a new Building Safety Levy applying to developers seeking building control approval in respect of higher-risk residential buildings in England. The levy will apply at the “Gateway 2” stage of the new building safety regime, after the planning application stage before building work starts. The levy is due to be introduced 18 months after the Bill receives Royal Assent. Further details will be contained in regulations including the rate of the levy.
- In a change to its policy, the government announced in January 2022 that it will scrap plans for the proposed loan scheme for leaseholders for the removal of cladding in medium rise flats. Instead, Michael Gove, the Secretary of State for Levelling Up, Housing and Communities, has written to the residential property developers industry asking developers to make financial contributions this year and in subsequent years to a dedicated fund to cover the full outstanding costs to remediate unsafe cladding on 11-18m buildings, currently estimated to be £4bn. The government has given the industry until early March to agree to a financial contribution scheme, otherwise the government has said it will impose “a solution in law”.
- In addition, the letter requests that developers fund and undertake all necessary remediation work to buildings over 11m that they have played a role in developing. It also requests that developers provide comprehensive information on all buildings over 11m which have historic fire safety defects, and which a developer has played a part in constructing in the last 30 years.
An immediate amendment to the Building Safety Bill was also announced to retrospectively extend the right of building owners and leaseholders to demand compensation from a building developer for safety defects up to 30 years old. The Bill as currently drafted covers defects up to 15 years old.
Court of Appeal to consider: When is a collateral warranty a construction contract?
In 2022, the Court of Appeal is due to hear the appeal in Toppan Holdings Ltd and another v Simply Construct (UK) LLP  where the court held that a collateral warranty was not a construction contract within the meaning of s.104 of the Housing Grants, Construction and Regeneration Act 1996. Key to that decision was that whilst the collateral warranty in question referred to both past state of affairs and future performance, it was executed four years after PC and months after the disputed remedial works had been completed by another contractor. The judge stated, “… where the works have already been completed, and as in this case even latent defects have been remedied by other contractors, a construction contract is unlikely to arise and there will be no right to adjudicate”. Consequently, whether a collateral warranty will be considered to be a construction contract and subject to adjudication will largely depend on when the collateral warranty was entered into. The Court of Appeal decision may bring some further guidance on this point.
And finally... retention reform?
The use of retentions is a divisive issue in the industry and there have been several attempts at reform. The most recent is a Private Members Bill currently progressing through Parliament. The Construction (Retentions Abolition) Bill seeks to abolish the use of retentions from 2025. Whilst it is rare for Private Members’ Bills to become law, the Bill does highlight the issues around the use of retentions. In its response to a consultation on the use of cash retentions which closed in January 2018, the Department for Business, Energy and Industrial Strategy recognised that there was a “breadth of views” in the sector on this issue with possible solutions ranging from banning cash retentions to maintaining the current approach or protecting retentions in a deposit scheme.
In Scotland, following a consultation on the use of cash retentions under construction contracts, a short life working group was formed to make recommendations on the use of retentions in construction contracts. Whilst an outright ban was not supported, the working group supported a reduction in the use of retentions and its recommendations included establishing a custodial Retention Deposit Scheme (following a detailed business case). Radical retention reform may not happen this year but there is likely to be continued interest in tackling the use and abuse of retentions in 2022.