Buyer beware: lessons for investors from the Get Living appeal verdict

In short, anyone investing in a residential asset now needs to think much harder about the potential for future liabilities. There must be a higher bar set for due diligence and contractual drafting to identify and apportion long-term risk.

For transactions on existing properties, it is a case of buyer beware, but in overdrive. If you are buying an asset, you are buying into its history – including its liabilities.

At face value, the Triathlon Homes case provides some comfort to investors. The ruling has clarified that legal responsibility to cover the cost of remediation can be traced back not only to the original developer, but also to any associated entity of that developer (in this case Get Living). However, in practice, a buyer will want to be crystal clear as to where claims – if needed – could be pursued, because building owners are not off the hook, and their risk rises significantly where the original developer no longer exists.

We expect to see much more scrutiny of structural surveys as an obvious starting point, to get a clear handle on where risks could lie. This will go hand in hand with tighter contractual drafting to allocate and apportion liability to developer-vendors as part of a deal.

Needless to say, vendors will be looking at their own protections too. The stage is now firmly set to establish a cascade of liabilities through the supply chain – with developers at the top – but investors will be wise to interrogate construction contracts and any inheritable warranties.

This interrogation is essential not only to understand underlying asset value and investment risk, but the potential for operational headaches and costs associated with building remediation. Legacy defects are not just yesterday’s problems – they are also today’s costs.

As we have seen in the Triathlon case, pursuing the developer and cycling back through corporate structures is challenging and slow. In the meantime, owners are liable for management and have immediate duties to perform for residents.

This has significant implications for how investments are set up, including the potential allowance for reserve funds. Of course, many owners already have significant experience of this, especially in the social housing sector where the financial pressures associated with remediation have been acute. However, reserves have been less common in purpose-built build-to-rent assets until now.

“As we have seen in the Triathlon case, pursuing the developer and cycling back through corporate structures is challenging and slow. In the meantime, owners are liable for management and have immediate duties to perform for residents”

Taken at face value, these developments present a further challenge for investors. Practically speaking, heightened scrutiny will often put a brake on the pace of transactions to allow additional time for due diligence and contractual negotiations to take place.

However, the clarifications that these rulings bring, together with an increasingly forensic approach, should also help buyers of rented assets proceed with more confidence.

There remain promising signs for the investment-grade rental property market overall. The build-to-rent sector has continued to mature in the UK and become normalised. The appeal of this asset class remains distinct – with a regular rental base driven by an overall shortfall in supply. Clear ownership structures that support asset management have attracted private capital, while the long-term returns support the needs of funds and institutional investors.

The Triathlon ruling has underscored the risks associated with older stock in particular, but it could mean that there are deals to be done that take account of the heightened risks. By comparison, newer properties could command a premium, particularly where a buyer is able to impose tight guarantees from the vendor to mitigate its own liabilities.

In social housing, the growth of the for-profit model likewise reflects significant interest for closely managed assets with predictable returns. The key difference for the for-profit model is the need to dovetail heightened contractual scrutiny with the well-established governance and regulatory requirements that come with affordable homes.

While bureaucracy deters transactions, uncertainty is worse. Getting to grips with the implications of recent appeal decisions would be time well spent.

James Corbett, partner, Winckworth Sherwood