A core aim of the Building Safety Act 2022 (BSA) is to ensure the real estate industry - rather than leaseholders or the taxpayer - meets building safety expenditure.
One way this is to be achieved is by introducing the Building Safety Levy under s.58 of the BSA.
The government has now moved one step closer to the implementation of the levy with the recent publication of a consultation outcome and the publication of a third consultation - closing on 20 February 2024. So, what does the consultation response and latest consultation reveal about how and when this levy may be implemented?
Currently, there is no indication as to what the levy rate will be, and this will be a crucial factor in determining the financial viability of future residential projects.
Until the levy rate is confirmed, it will be difficult to predict whether the introduction of the levy will hit the delivery of new homes and other forms of ‘accommodation’. However, the government recognises that implementing the levy could impact housing supply, but intends to address this by setting a differential geographic levy rate based on house prices in local authority areas.
Therefore, there will be a standard rate per square-metre for each local authority area and these rates will be set out in secondary legislation.
A 50% discount will also be applied to the levy rate for developing brownfield (“previously developed”) sites. This is to reflect the higher cost of developing these sites, and the increased risk that these projects may become unviable. What will be considered as previously developed will be set out in secondary legislation and it is proposed that the discount will apply to sites where the area within the planning permission redline boundary consists of more than 50% previously developed land types.
The levy will be charged on a per square metre basis rather than a per unit basis. However, the government has not decided how floorspace will be measured.
The second consultation proposes floorspace should be calculated using Gross Internal Area measured in accordance with the Royal Institute of Chartered Surveyors Code of Measuring Practice. It is not clear at this stage which areas will be included in this calculation and clarity on this will be of particular importance to developers involved in mixed-use developments.
Residential buildings in scope
The scope is potentially wide - applying to new buildings in England containing one or more residential dwellings and other accommodation, including temporary accommodation, which the BSA mentions could include hotels and hospitals.
The consultation response confirms the levy will apply to the development of private older people’s / retirement housing “due to the profit-making nature of these developments”. Build to rent developments and purpose-built student accommodation (PBSA) will also be within the levy’s scope.
The government intends developments of fewer than 10 units / PBSA of fewer than 30 bedspaces to be exempt from paying the levy. This is to protect the viability of small sites.
In addition, it is proposed that the following are exempt from the levy so as not “to penalise unnecessarily or prevent the development of important community facilities”:
- Affordable housing, including social rented, affordable rented and intermediate housing, provided to specified eligible households whose needs are not met by the market
- Non-social homes built by not-for profit Registered Providers - and their subsidiaries - as it is a component of their operating model to provide more affordable homes and to reinvest profits to benefit social and affordable housing tenants
- NHS hospitals, NHS medical homes, and NHS GP practices
- Supported housing, save for private tenure supported housing, such as private retirement housing with an element of support
- Children’s homes
- Domestic abuse facilities
- Criminal justice accommodation
- Accommodation for armed forces
- Care homes and nursing homes
Developers will be expected to submit detailed information in order to qualify for these exemptions and this will be set out in regulations and guidance.
The second consultation invites views on a number of other potential exclusions, including hotels, non-NHS hospitals, hospices, monasteries, and similar religious establishments, drug/alcohol treatment centers, temporary accommodation for homeless people and school premises primarily used for housing pupils.
Secondary legislation will set out the process for collecting the levy.
Local Authorities will act as the collection agents for the levy and this will be payable in one instalment as opposed to two staged payments that had been previously proposed.
Developers will have flexibility about when the levy is paid, but it must be paid before the completion certificate is issued or the final certificate is accepted for a development. This is to assist developers in managing cash flow and to reduce the reliance on borrowing. It is intended that the sanction for non-payment of the levy will be withholding or rejection of the final certificate on a development.
There is currently no indication of when the levy will be implemented.
In terms of transitional periods, the government intend that developments that have begun the building control process (i.e. submitted a full plans application, or an initial notice, or a gateway 2 application) before the launch date will not be subject to the levy charge.
The levy has significant financial implications for the real estate industry. The government has estimated that the overall levy target is £3bn to be raised over 10 years - or more - in order to remediate life critical defects in existing residential buildings.
The government intends to review the levy every three years to enable them “to adjust the levy in light of data on revenues raised, anticipated revenue based on updated forecasts and greater certainty on the costs of remediation”. The consultation response states that: “Over time, the government expects that the cost of the levy will be reflected in the price that developers are willing to pay for land, preserving the viability of new projects.”
For the industry, certainty as to levy rates and when these will be introduced is key for forward planning. However, it may have to wait for the outcome of this latest consultation and the introduction of secondary legislation in Parliament to find out the government’s intentions in respect of these important details.
There are concerns the levy could adversely affect housing supply and so confirmation of the levy rate would be welcomed, so the living sector can fully assess the impact on future work pipelines.