It’s not unusual for some housebuilders to use Special Purpose Vehicles (“SPV”) to acquire and then develop sites. The SPV is usually a limited company with minimal assets. To date the use of an SPV has offered the advantage of ringfencing any potential liability associated with a particular scheme, thereby protecting the assets of the wider corporate group. Often the SPV is wound up after a period of time, for example, when the management company takes over responsibility for the ongoing maintenance of any unadopted common areas.
However, the continued use of SPVs to ringfence liability and thereby mitigate development risk must be reconsidered in light of the Building Safety Act 2022 (BSA”).
Why do housebuilders use Special Purpose Vehicles?
The main reasons SPVs have been used in residential development include:
- Liability ringfencing – limiting financial exposure to a single project.
- Asset protection – safeguarding the wider corporate group from project-specific risks.
- Flexibility – allowing housebuilders to dissolve the SPV once its role is complete.
This structure has long been seen as an effective way to manage development risk.
The impact of the Building Safety Act 2022
The Building Safety Act 2022 (BSA) provides a mechanism for an affected party to obtain a Building Liability Order (BLO). Such an order is designed to ensure that all those directly involved in the original development cannot avoid liability in the event that the construction works are subsequently found to be defective and thus unsafe. It applies to liability created by the Defective Premises Act 1972 for uninhabitable residential buildings, where there is a building safety risk as defined in the Building Safety Act creating a risk to the safety of people in or about the building arising from the spread of fire or structural failure.
What does a Building Liability Order cover?
A Building Liability Order (BLO) allows the affected party to sidestep the legal rule of privity of contract, which (in the absence of collateral warranties or statutory rights) precludes claims against third parties who were not a signatory to the contract. This means that it is now possible for an affected party to ask the court to make an order joining in more valuable asset rich members of the corporate group to the original development liability even if the original SPV is dormant, insolvent or dissolved.
Access to information on associated companies
Connected to the Building Liability Order mechanism is the right for an affected party to apply for information to ascertain who the associated companies are in order to be able to implement the Building Liability Order mechanism.
Should SPVs still be used in residential development?
Given these legislative changes, housebuilders should carefully consider whether the continued use of SPVs in residential development is worthwhile. While SPVs previously provided a degree of protection, the Building Safety Act 2022 reduces their effectiveness as a tool for development risk management.
The information provided in this article is provided for general information purposes only, and does not provide definitive advice. It does not amount to legal or other professional advice and so you should not rely on any information contained here as if it were such advice.
Wright Hassall does not accept any responsibility for any loss which may arise from reliance on any information published here. Definitive advice can only be given with full knowledge of all relevant facts. If you need such advice please contact a member of our professional staff.
The information published across our Knowledge Base is correct at the time of going to press.
