Risk Dimensions Newsletter Issue 10: October 2023

In the latest edition of our Risk Dimensions newsletter, Andrew Butler KC of Tanfield Chambers, who was a guest panellist at our recent property webinar, reflects on the Building Safety Act 2022, 18 months on after receiving Royal Assent. Additionally, Dr David Kelly, Climate Resilience Lead and ESG Specialist at Marsh Advisory UK, considers key aspects of the Marsh sponsored Legal Business Risk Management and Professional Indemnity Survey 2023 relating to ESG considerations and law firm awareness.

ESG and changing paths for law firms

Authors: Dr David Kelly, Marsh Advisory

Environmental, social, and governance (ESG) is becoming more embedded in business culture across all sectors. The latest annual report from Marsh and Legal Business, Walking the Talk, reflects this trend in the legal profession and provides data showing the growth of ESG activity. As activity in this space increases, it is useful to periodically reflect on the definition and purpose of ESG. This ensures that organisations do not lose sight of the overall objectives of ESG, while developing layers of data gathering and governance across their operations.

“Environmental, social, and governance (ESG) is increasingly seen as the measure of the sustainability and resilience of an organisation. It is not only focussed on climate change and environmental performance, but also the ethical aspects of an organisations governance and how that impacts upon staff and wider society.”   

Marsh Advisory (2021)

In its growing influence within business, ESG activity typically focusses on the ‘environmental’ pillar, which remains topical and attached to national and international priorities in relation to climate change. The 2023 Walking the Talk report reveals several interesting concerns, particularly around raising awareness of ESG and setting appropriate targets for improvement. The former has remained at the forefront of those firms contributing to the 2023 report, while setting targets has escalated in priority in the past twelve months. Interestingly, the top priority in the 2023 survey did not change from 2022 results: ‘Re-assessing risk due to changes in the external business environment’.

Beyond the legal profession, reputational risk in relation to ESG is receiving more attention. Businesses are increasingly concerned with how their behaviour is perceived externally, particularly by stakeholders and parties that may provide access to finance and/or insurance. Also of concern are risks posed by clients or supply chain partners that could, by association, have a negative impact upon an organisation’s ESG position. ESG risks of this nature can elevate and accelerate concerns to the top of an organisation’s hierarchy.

Reputational risk in an ESG context has an internal and an external face. All businesses will have the opportunity to establish internal processes to manage risks that could lead to reputational damage. Cyber risk and data protection remain high on the list of concerns for many clients, which is likely to continue as the sophistication of digital crime evolves. The ability of an organisation to protect its digital content is a key component for demonstrating its resilience and sustainability.

Increasing ESG activity across all sectors will push the legal profession to actively align with client expectations and corporate ESG strategy. Clients are unlikely to select business and/or advisory partners that could negatively impact their own ESG position or provide opportunity for criticism and possible reputational damage. How organisations exert influence across their value chain is often an important metric when assessing each firm’s ESG maturity. The intention here is to cause a ripple effect across industries and their value chains, which supports the uptake of ESG sentiments as widely as possible.

Similarly, legal firms have stated that they increasingly look at existing and new clients through an ESG lens. Among respondents to the 2023 survey, 66% said that they already assess existing or potential clients on their ESG policies and how their activity could affect the legal partner. A further 22% of respondents stated that, although they currently do not assess clients in this way, it is something they would consider in the future.

These statistics demonstrate an increasing awareness of reputational risk, as well as possible negative impacts via association. Conversely, 12% of respondents stated that they currently do not, and are not planning to, assess clients and prospects in this way. The survey also highlighted that although 66% of respondents already assess clients on ESG policies, only 22% said that these considerations led to the firm refusing instructions or altering its approach to new client acceptance.

These findings may appear contradictory. However, they highlight the dynamic perspective within legal engagements in relation to the emphasis placed on ESG. The client engagement is clearly being influenced by ESG factors; however, it currently does not appear to broadly influence firms decisions on whether to refuse instruction. 

Consequently, legal firms not only should develop their own ESG activity, demonstrating progress and reporting regularly, but they should also assess the possible negative impact by association that could come from clients. Commercial considerations are also likely to be a factor to consider and balancing these issues will cause concern for legal firms. A well-defined ESG strategy, with clear integration across governance procedures, will help address the balance associated with possible reputational risk. However, given changing regulatory and societal demands, how this trend develops bears watching.

The Building Safety Act - Early Reflections

Author: Andrew Butler KC, Tanfield Chambers, London

“Too early to tell” – the response famously attributed to Chinese Premier Zhou Enlai when he was asked about the effect of the French Revolution. The same response could be given in answer to a question about the effect of the Building Safety Act 2022. Given that the latter is 233 years the junior of the former, and only bursting into life incrementally even now, the answer would be somewhat easier to justify in this context. While, thankfully, the legislation has not quite generated the bloodshed seen on the streets of Paris in 1789, it is fair to say that its early stages have not been a model of liberté, egalité and fraternité themselves.

The Act first came into my consciousness, as a barrister with an interest in all things commercial and property-related (and particularly in professional negligence disputes emanating from those areas) when I was alerted to the extreme consternation being felt by conveyancing solicitors about transactions involving long leases of flats in relevant buildings. It is fair to say that the limitations and protections against the payment of service charge which are contained in Schedule 8 to the Act are indeed labyrinthine – but the reaction which was being reported (with solicitors anecdotally being unwilling even to act on sales and purchases of affected properties) was, if true, wholly disproportionate. Of course, solicitors cannot reasonably be expected by clients to forecast the precise effect of the Act on liability for service charges in the years following an acquisition, still less the Act’s likely impact on property values; but they can at least alert clients to the existence of the new regime and its possible application. After all, if conveyancers are not going to do so – who will?

One unwelcome development which has come to my attention is the news that some insurers are apparently declining to offer cover to firms undertaking work relating to the Act. This seems to me a short-sighted approach, but it is no doubt a reflection of the complexity of the Act, and the concern which it has engendered. If that position becomes more widespread, it seems possible that it will have a serious impact on the conduct of conveyancing business.

Generally, though, as time passes, my sense is that the legal profession is overcoming the initial panic and bracing itself to deal with what is, undoubtedly, a tortuous set of provisions. As it does so, curiously unforeseen scenarios are coming out of the woodwork. The provisions of the Act surrounding qualifying leases, for example (which are the only leases to qualify for the majority of protections) turn out to be predicated on the leaseholders being what lawyers – with our famous gift for plain speaking - call “natural persons” (or “human beings” to normal, erm, natural persons). Issues to have crossed my desk recently include: what happens if the tenant of what would otherwise be a qualifying lease was, at the relevant time (14 February 2022), not a natural person at all, but a company? And what happens if the tenant was deceased at that time? These are far from extraordinary scenarios which the draftspeople of the Act seem not to have contemplated. And, like everyone else, I can only try to piece together the answers from the somewhat inapposite language in the statute. (For example: can companies, or dead people, be said to have “only or principal homes”?).

Certification also continues to be a major headache, not least because of lenders demanding to see certificates where none exist, or are needed. It seems to have taken a long time to appreciate – if it is appreciated, even now – that leaseholders are rarely required to provide certificates, and that the absence of one will rarely work to their disadvantage. It is only if a landlord has followed – to the letter – the regime prescribed under para.6 of the Building Safety (Leaseholder Protections) (Information etc.) (England) Regulations 2022 (SI 2022/859), and any other reasonable steps, that a leaseholder certificate will be required to ensure that a lease is treated as a lease which qualifies for the service charge protections. If the landlord has not done those things, the question of qualification will be decided by the nature of the building and the terms of the lease alone. The building must be over 11m high or contain at least five storeys, in either case with at least two dwellings. Leases within such buildings which were granted before 14 February 2022, for a term of over 21 years, and under which the tenant is liable to pay a service charge will qualify; leases which do not meet these criteria will not.

From the landlord’s perspective, certification is a much greater concern. Not only is the onus on the landlord to do everything required to obtain a leaseholder certificate, but their own certificates (under the Building Safety (Leaseholder Protections) (England) Regulations 2022 (SI 2022/711)) need to be given precisely on time, and exactly in compliance with the legislation, if defects are not to be deemed their responsibility. There had been hope that amending regulations would simplify the process, but when these came into force (as the Building Safety (Leaseholder Protections etc.) (England) (Amendment) Regulations 2023 (SI 2023/895)) this proved not to be the case. The procedure is now at least more streamlined – in the sense that the information which must be given in certificates is more closely tailored to the underlying factual circumstances – but there is little relief from the complexity of the process. And it remains the case that if the information required needs to be elicited from a predecessor in title, that predecessor (even assuming it still exists) can take a leisurely three weeks, of the four in total which are usually available to the current landlord from the occurrence of the various trigger events, to provide it. As they might say across the pond – you do the math. Nor is there any particular sanction if a predecessor in title fails to comply even with that timescale.

Another part of the Act which is starting now to cause serious anxiety is the registration of Higher Risk Buildings under s.78 of the Act. Higher Risk Buildings, of course, are buildings which are at least 18m in height or contain at least 7 storeys, and in either case contain at least two residential units. The (non-statutory) deadline which has been given for the registration of these buildings to take place is 30 September 2023. The requirements of registration - which are not straightforward - fall to the so-called Principal Accountable Person (“PAP”), on pain of criminal sanction if it is not done. Working out who the PAP is, however, can be far from straightforward. In situations of complex leasehold structure, the rule of thumb is that it is the entity highest up the chain which has a repairing obligation over the relevant parts of the structure and exterior of the building. This is counter-intuitive, certainly if (as is often the case) an intermediate lessee has delegated its repairing obligations under a sub-lease and has little practical involvement in the day-to-day management of the building.

The Act even has an idiosyncratic approach to the concept of height. The height of a building, for the purposes of the Act, is not measured from ground level to the top of the roof, as one might expect. It is measured from ground level to the “finished surface of the floor of the top storey of the building”. Accordingly, in many cases, it will not be possible to know from the outside whether a building is a “relevant building” or a “higher risk building”, as the case may be. I am told that the challenge of discovering whether buildings meet these criteria is spawning a sub-industry in itself.

Not much of this has yet reached tribunals; there is very little judicial interpretation of the Act or supporting regulations yet available. Some particularly switched-on tenants have already applied for, and even obtained, Remediation Orders, or Remediation Contribution Orders, but those that have reached a final determination have mainly gone through unopposed (see, as an example, Batish -v- Inspired Sutton Ltd., a decision made by the First Tier Tribunal on 13 January 2023). Colleagues who sit in the Tribunals tell me that a rash of cases is expected this autumn; we can expect our first insight into how judges will tackle some of the many thorny issues thrown up by the legislation as decisions start to be published.

In the meantime, practitioners must just do the best they can. A little-known adjunct to the Act which explain some of the concepts (usually in much plainer English than the Act itself) is the Explanatory Notes published by the Government and available on the www.legislation.gov.uk website; a simple Google search of “Building Safety Act Explanatory Notes” will lead straight to them. At 408 pages and 1921 paragraphs, this is itself not a document for the faint-hearted; but it is clearly structured and set out, and worth consulting on points of difficulty.

At the risk of labouring beyond breaking point the somewhat unlikely historical parallel with which I started this article, those hoping that the Act is destined for the guillotine are likely to be disappointed. Too much has already happened for its effect to be readily reversible. The best that can be hoped for, amongst the heartache and anxiety that it is causing, is the revolution it is causing is at least effective.

Marsh Risk and Error Management Team comment:

This October’s renewals have highlighted general issues that some underwriters have with the Building Safety Act. Regrettably, this meant we had to ask some firms, especially in the SME sector, at fairly short notice, to provide additional information. With one particular underwriter this also meant dealing with insurer pre conditions (subjectivities).

Before April renewals we are hoping that underwriters who still have concerns can provide clear reasoning as to their particular fears, so that clients have adequate opportunity to locate records and provide reassurance.