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Deal-Savvy Due Diligence: Addressing Potential Cladding Issues

Technical Due Diligence for Tower Acquisitions in the UK

Technical Due Diligence for Tower Acquisitions in the UK

The latest release of The Grenfell tower inquiry reveals a dismaying array of factors leading to the catastrophic fire, implicating builders, local government, the London fire brigade, and others. Above all, the inquiry found that building cladding and insulation on the refurbished tower made it noncompliant with building regulations. The second release of the inquiry will focus on the actual cause of the fire and its acceleration and may potentially address the long overdue review of building regulations as well as inspection and enforcement of those regulations.

 

Since it was established in August 2017, the inquiry has cost an estimated £40M, the bulk of which has been directed towards legal fees. This sum far exceeds what it would have cost to replace the exterior panels at Grenfell; it could also have covered a significant portion of the cost of resolving similar issues identified in over 300 other tower blocks. The government initially provided a fund for the removal and replacement of ACM (Aluminium Composite Material) cladding. However, delays and red tape in administering the fund have left hundreds, if not thousands of people living in fear, unable to move or sell their affected apartments. In addition, tests on non- ACM cladding have revealed HPL (High Pressure Laminate) is found on numerous tower blocks all over the UK and burns 115 times hotter than non-combustible products. This is still being investigated and adds to the list of at-risk buildings.

For prospective buyers and investors seeking tower deals, the market is now even more complex. Technical due diligence is of utmost importance, as the presence of ACM or HPL in the subject property now represents a significant risk in terms of cost and timescale for removal and re-installation. A thorough Property Condition Assessment (PCA), also known as a building survey, should be conducted by a qualified engineering consultant.

When engaging a consultant for technical due diligence, investors must recognize that the PCA offers a snapshot of a property at a given date in time. It will report on the cladding in-situ and check on the approvals obtained at the time of installation.

It is important to understand that a PCA will not provide advice as to the legal obligations being undertaken by a prospective buyer. Buyers and investors should retain legal counsel in relation to any purchase or sale, as statute and legal interpretation of leases is ever changing. Legal advice should be sought at the earliest opportunity and run alongside the technical survey process. Your engineering firm should be experienced in working with legal counsel, as coordinated efforts will produce the best outcome for your deal.