THE PFI RECKONING · ARTICLE 7 OF 12
Contractual Maintenance vs Statutory Compliance: Who Pays for the Gap Between 2001 Specs and 2026 Law
The FM provider maintained the building to the specification agreed at financial close. That specification reflected the regulatory environment of 2001 or 2004 or 2008. It does not reflect the Building Safety Act 2022, current fire safety regulations, updated Legionella and water hygiene standards, or 2026 statutory requirements. The authority inherits an asset that may be contractually compliant but statutorily exposed. This article examines where the gap between contractual maintenance and statutory compliance is widest, who is legally responsible, and what it costs to close.
Two different versions of compliance
There is a fundamental distinction that most PFI contracts do not resolve clearly. Contractual compliance means the FM provider delivered the maintenance specified in the output specification and the FM service agreement. Statutory compliance means the building meets current legal requirements for safety, health, fire protection, and environmental performance.
These are not the same thing. They were closer to the same thing in 2001 when the contract was signed. Over 25 years, regulations have changed, standards have evolved, and new legislation has been introduced that the original contract could not have anticipated. The FM provider’s obligation is to the contract. The authority’s obligation, as the occupier and in many cases the duty holder, is to the law.
At handback, these two obligations collide. The SPV says: we maintained to the contract. The authority says: the building does not meet current statutory requirements. The contract is frequently silent on who bridges the gap.
The FM provider’s obligation is to the contract. The authority’s obligation is to the law. At handback, the gap between the two is where the most expensive disputes begin.
Where the gap is widest
The Building Safety Act 2022 introduced fundamental changes to building safety regulation, particularly for higher risk buildings. It created the role of the Building Safety Regulator, established new dutyholder responsibilities, and required the maintenance of a Golden Thread of building safety information throughout a building’s life. PFI contracts signed before 2022 do not reference these requirements. The FM provider was not obligated to comply with legislation that did not exist when the contract was signed.
At handback, the authority assumes dutyholder responsibilities under the Act. If the building’s fire safety systems, compartmentation, cladding, means of escape, or fire safety management arrangements do not meet current requirements, the authority is immediately exposed. The cost of remediation can be substantial. The contract does not require the SPV to fund it.
Legionella and water hygiene
Water hygiene management standards have evolved significantly over 25 years. Current HSE guidance, ACOP L8, and HTM 04-01 for healthcare estates set requirements that did not exist or were less prescriptive when many PFI contracts were signed. The FM provider may have managed water systems to the original specification without meeting current standards for temperature monitoring, dead leg management, outlet flushing, and risk assessment frequency. The system may be contractually maintained but not statutorily compliant.
Asbestos management
The Control of Asbestos Regulations 2012 and subsequent updates have tightened requirements for asbestos surveys, management plans, and duty to manage obligations. PFI estates built or refurbished before 2000 frequently contain asbestos in locations that were not fully surveyed at the time of the original contract. The asbestos management plan in the FM specification may be based on a 20 year old survey that does not reflect current expectations for intrusive survey coverage and risk management.
Electrical safety
The IET Wiring Regulations (BS 7671) have been updated multiple times since 2001. Periodic inspection and testing requirements have become more specific. The frequency and scope of electrical installation condition reports expected under current guidance may exceed what was specified in the original FM contract. An installation that was compliant at commissioning may not be compliant under current standards without remedial work.
Energy performance and net zero
Energy performance requirements have changed dramatically. Minimum Energy Efficiency Standards, Display Energy Certificates for public buildings, and carbon reduction commitments under the Climate Change Act all impose obligations that the original PFI specification could not have anticipated. A building that met 2001 energy standards may be significantly below 2026 expectations. The cost of upgrading insulation, replacing plant with higher efficiency systems, and meeting carbon reporting requirements is not funded through the lifecycle programme.
SFG20 specification drift
Where the original FM specification references SFG20 maintenance schedules, the standard itself has been updated multiple times over 25 years. SFG20 task codes, frequencies, and scope have changed. The SFG20 schedule the FM provider is working to in 2026 may not be the same schedule that was specified at financial close. Whether the provider should be maintaining to the original version or the current version is a contractual question that many contracts do not answer clearly. The SFG20 Reckoning series examines the structural limitations of SFG20 as a compliance framework in detail, including why task durations, scope, and compliance definitions have shifted over time.
The FM provider maintained to a 2001 specification. The authority inherits a 2026 legal obligation. The gap between the two is unfunded, unplanned, and in many cases unquantified until handback.
The dual benchmark: every sector has its own compliance stack
Statutory compliance at PFI handback must be tested against two benchmarks simultaneously. The first is the contractual output specification: does the asset meet the handback standard defined in the project agreement? The second is the relevant asset standards framework for the sector: does the asset meet current statutory and regulatory requirements specific to its use? NISTA’s Asset Related Standards Toolkit, published as part of the expiry guidance suite, supports exactly this dual test. The sections above cover the cross sector compliance areas. The sections below cover the sector specific frameworks that authorities must also address.
Healthcare PFI: the HTM stack and NHS Condition B
Healthcare PFI is the largest single sector in the portfolio. The current compliance benchmarks for NHS estates are the Firecode suite of HTM 05-01 (managing healthcare fire safety, updated February 2026), HTM 05-02 (functional provisions for fire safety in the design of healthcare premises, which explicitly replaced the legacy HTM 81 and HTM 85), and HTM 05-03 (operational provisions, August 2008), alongside HTM 03-01 (specialised ventilation for operating theatres and critical care), HTM 04-01 (water hygiene and Legionella management, April 2017), HTM 06-01/02/03 (electrical services supply and distribution, low-voltage and high-voltage safety guidance). IHEEM-endorsed maintenance schedules apply where specified. CQC registration requirements add a further regulatory layer. Asset condition at handback should be benchmarked against NHS Condition B under the NHS Risk Based Methodology (2004): sound, operationally safe, exhibits only minor deterioration. Condition B is the negotiable standard that NHS Trusts will be assessing the asset against, regardless of how the contractual handback specification was originally drafted. An NHS PFI estate handed back without current compliance against the live HTM stack and at less than Condition B is a clinical safety risk from day one. Note that HTM 81 (the legacy fire precautions standard for hospitals) was applicable to many PFI hospitals at design time before HTM 05-02 superseded it; that legacy applicability is the context for the St James Oncology case discussed below, where HTM 81 was the standard incorporated into the 2004 Project Agreement.
The HSJ Partner and WSP report, PFI Countdown: Securing the NHS Estate for Tomorrow (February 2026), provides further NHS-specific analysis of how compliance gaps at handback translate into capital requirements for trusts inheriting PFI estates. The report sets out the dual challenge facing trusts: bringing the inherited estate up to current HTM standards on day one of post-handback operation, and funding the ongoing capital programme required to keep it there over the following decade. For trusts running the dual-benchmark assessment described above, the HSJ/WSP analysis is a useful reference for the capital-cost dimension of the gap between contractual specification and current operational standard.
Education PFI: CDC2, RAAC, and Building Bulletins
The DfE Condition Data Collection 2 (CDC2), running through 2026, provides the current baseline for school estate condition across England. DfE Building Bulletins set sector specific design and compliance standards, including BB100 (fire safety), BB101 (ventilation), and BB93 (acoustic design). RAAC (reinforced autoclaved aerated concrete) management is now a significant compliance consideration. Most PFI schools were built after the high RAAC use period of the 1950s to 1990s, but the management duty applies regardless. The cost of any RAAC discovery post handback falls on the authority. Asbestos management under the Control of Asbestos Regulations 2012 applies with the asbestos register as a contractually transferable record that the authority must verify before accepting.
Social housing PFI estates are now subject to the Decent Homes Standard, Awaab’s Law (the Hazards in Social Housing legislation that came into force in October 2025 requiring landlords to address damp, mould, and condensation within specified timeframes), the Building Safety Act 2022 dutyholder regime for higher risk buildings, and the Social Housing (Regulation) Act 2023. Many social housing PFI estates are caught by higher risk building rules they were never originally specified against. The compliance gap between the original PFI specification and the 2026 regulatory environment in social housing is substantial.
What an Awaab compliance gap looks like in practice
To make the social housing compliance gap concrete, consider an anonymised composite drawn from a recurring pattern across housing PFI engagements. The contract was a residential PFI covering a stock of approximately 750 dwellings procured in 2004 against a specification that pre-dated the Decent Homes 2006 update, the Housing Health and Safety Rating System development, the Building Safety Act 2022, and Awaab’s Law. The condition survey at year 19 reported the stock as broadly compliant with the original output specification. The independent compliance gap analysis, run against the current statutory and regulatory standards, found a different picture. Approximately 220 properties had ventilation and damp-management arrangements that would not meet the operational requirements introduced by Awaab’s Law for response and remediation. Approximately 90 properties had fire-stopping or compartmentation issues that engaged the Building Safety Act 2022 dutyholder duties for buildings over 18 metres or 7 storeys, where the original specification had not been written against the higher-risk-building regime. Cladding, electrical safety remediation, and energy performance upgrades together accounted for the balance of the gap. The total compliance gap costed at 2026 rates was approximately £4.7m, against an SPV-led handback assessment of approximately £0.6m of remediation under the original output specification. The structural point is not that the SPV was wrong on the contractual standard. The structural point is that handing back to that standard alone leaves the authority with the £4.7m liability on day one of post-handback operation, and a regulator who does not accept the original PFI specification as a defence to current statutory duty. Authorities approaching social housing PFI handback should commission the dual-benchmark assessment in the seven-year window, not in the survey year.
Prison PFI: HMPPS and secure infrastructure
Prison PFI contracts operate under HMPPS service standards and secure infrastructure obligations supervised by the Ministry of Justice. The HMP Kilmarnock handback in March 2024 is the live precedent for prison PFI expiry. The specific dynamic of operating a secure facility during the handback transition, maintaining regime continuity while conducting surveys, and managing workforce transfer within a secure environment adds complexity that other sectors do not face.
Street lighting PFI: the earliest handback lessons
Street lighting PFI is one of the earliest sectors to show the asset returned below expected condition problem at scale. Compliance benchmarks include ILP (Institution of Lighting Professionals) guidance, BS 5489-1 (road lighting design code), and the duty to maintain under the Highways Act 1980. Recent reporting on street lighting PFI handbacks suggests that authorities are inheriting assets with shorter remaining life than expected and higher capital replacement costs than the lifecycle fund provided for.
Waste and energy from waste PFI
Waste and EfW PFI contracts operate under environmental permits issued under the Environmental Permitting Regulations 2016, BREF (Best Available Techniques Reference Document) compliance obligations, and transposed Waste Framework Directive duties. Emerging Carbon Border Adjustment and EU ETS interactions affect energy from waste plant. The regulatory environment for waste processing has changed materially since many of these contracts were signed.
MOD and Defence accommodation PFI
Defence PFI estates operate under JSP 375 (MOD safety management system) with DIO (Defence Infrastructure Organisation) RAAC alerts applicable across the defence estate. A specific complexity arises where MOD estate is occupied by US Visiting Forces under bilateral agreements, creating a dual jurisdiction question. This affects a small number of contracts but is commercially material for those affected.
The case most PFI practitioners will have encountered is St James’s Oncology SPC Ltd v Lendlease Construction (Europe) Ltd [2022] EWHC 2504 (TCC), Mrs Justice Joanna Smith DBE. The PFI Project Agreement was signed in October 2004 between Leeds Teaching Hospitals NHS Trust and the Project Company for the design, construction and maintenance of the Oncology Centre at St James University Hospital, Leeds, with a base contract sum of over £173m and practical completion certified in December 2007. The Project Agreement required compliance with HTM 81 (then the applicable standard for fire precautions in new hospitals, since superseded by HTM 05-02). Fire safety design defects were discovered between 2014 and 2017. Proceedings were issued on 11 December 2019 shortly before the twelve-year limitation period expired. The TCC found that Plant Room 2 did not satisfy HTM 81 and that Lendlease’s revised fire strategy did not amount to a justified fire-engineering derogation. The Fire Strategy Defence was rejected. Total quantum awarded was over £5m. For any healthcare PFI authority approaching handback, the St James case is the named precedent for how compliance gaps in fire safety become enforceable claims, and for the practical importance of preserving the limitation position before it expires.
A second related case extends the lessons. Children’s Ark Partnerships Ltd v Kajima Construction (Europe) (UK) Ltd [2022] EWHC 1595 (TCC), affirmed on appeal as Kajima Construction Europe (UK) Ltd v Children’s Ark Partnership Ltd [2023] EWCA Civ 292, concerned the PFI for the redevelopment of the Royal Alexandra Children’s Hospital in Brighton (Brighton and Sussex University Hospital NHS Trust). The Project Agreement was dated 10 June 2004. Fire safety defects (cladding and fire-stopping) were discovered in 2018 in the wake of Grenfell. The Trust applied service-failure deductions to the Project Company under the Project Agreement; the Project Company sought reimbursement from Kajima under the Construction Contract. The Project Company commenced proceedings on 21 December 2021 to protect against limitation expiry, and Kajima applied to strike out on the basis that the contractual Dispute Resolution Procedure (referral to a Liaison Committee) had not been complied with. The TCC and Court of Appeal both held the DRP was not sufficiently clear and certain to be enforceable, in part because Kajima was not a member of the Liaison Committee. The case illustrates two further lessons for PFI handback: dispute resolution clauses must be drafted with clarity if they are to operate as conditions precedent, and standstill agreements with protective claim issuance are now an established practical technique in fire-safety PFI claims approaching limitation. The Lancashire Schools SPC v Lendlease litigation in 2024 reinforces both points.
Who is legally responsible
The short answer is: the authority. As the building owner and in most cases the occupier, the authority holds statutory duties that cannot be contracted out. The FM provider’s obligation is contractual. The authority’s obligation is legal. If the building does not comply with current legislation, it is the authority that faces enforcement action, not the SPV.
This creates a structural problem at handback. The authority may have a contractual claim against the SPV for failure to maintain to the handback standard. But the handback standard in the contract was defined in 2001 terms, not 2026 terms. The SPV’s defence is straightforward: we delivered what the contract required. If the law has changed, that is a legislative risk that sits with the building owner, not with the service provider.
Some later PFI contracts include change in law provisions that allocate the cost of regulatory change between the parties. In practice, these provisions are narrowly drafted, heavily contested, and difficult to enforce for gradual regulatory evolution rather than single legislative events. The Building Safety Act is a specific legislative event. The gradual tightening of water hygiene, asbestos management, electrical safety, and energy performance standards over 25 years is not.
The Good Industry Practice argument
Most PFI contracts include a clause requiring the SPV to maintain the asset in accordance with Good Industry Practice. This is the authority’s strongest contractual lever. Good Industry Practice is not defined by the specification agreed at financial close. It is defined by current professional standards. If SFG20 maintenance schedules have been updated, if HTM guidance has evolved, if professional bodies have issued revised recommendations, the authority can argue that a provider still working to a 2001 version of the specification is in breach of the Good Industry Practice obligation even while technically meeting the original output specification.
This argument does not resolve the compliance gap entirely. But it narrows the gap between what the contract requires and what current practice demands. Authorities should identify the Good Industry Practice clause in their contract early and use it as the basis for challenging maintenance standards before the handback negotiation begins, not during it.
Statutory duties cannot be contracted out. If the building does not comply with current law at handback, it is the authority that faces enforcement action. The SPV’s obligation ends with the contract. The authority’s obligation continues with the building.
What this costs
The cost of bridging the compliance gap varies by building type, age, and the extent of regulatory change. But the following categories are common across PFI handbacks:
Remediation cost estimates for fire safety, water hygiene, electrical, and energy performance upgrades should be benchmarked against current cost data rather than the lifecycle fund’s original financial-close assumptions. The BCIS Intelligence Series examines the accuracy and limitations of BCIS as a benchmarking tool for capital and remediation works, including where regional adjustment, building-type weighting, and current-versus-historic indices materially affect the figure that ends up in the authority’s capital plan.
Fire safety remediation
Compartmentation surveys, fire door replacement programmes, cladding remediation, fire alarm system upgrades, emergency lighting improvements, and means of escape enhancements. On a large NHS PFI estate, fire safety remediation alone can run to millions of pounds. This is capital expenditure the authority must fund from its own budget because the lifecycle fund was not designed to cover regulatory upgrades.
Water hygiene system upgrades
Dead leg removal, temperature monitoring installation, outlet replacement programmes, and risk assessment commissioning to meet current HTM 04-01 or ACOP L8 standards. These are operational and capital costs that accumulate across a large estate.
Electrical remediation
Remedial works arising from electrical installation condition reports conducted to current standards. Distribution board replacements, earthing upgrades, and wiring remediation on systems that were compliant at installation but have degraded or been superseded by updated regulations.
Energy performance upgrades
Plant replacement with higher efficiency systems, building fabric improvements, controls upgrades, and metering installation to meet current energy performance and carbon reporting requirements. These are significant capital investments that were not contemplated in the original PFI financial model.
For NHS estates, the relationship between capital funding, condition data, and regulatory compliance is shaped by ERIC reporting and the NHS Capital Guidance framework. The ERIC Reckoning series examines how the 85/15 capital allocation formula and critical infrastructure risk weighting drive the funding available for exactly these post handback compliance costs.
The compliance gap at PFI handback is not a maintenance problem. It is a capital expenditure problem. The lifecycle fund was designed to replace like for like. It was not designed to fund regulatory upgrades. That cost falls on the authority.
What authorities should do before handback
NISTA guidance expects the Senior Responsible Owner (SRO) for PFI expiry to initiate the compliance gap analysis as part of the seven year planning programme, in parallel with the condition survey and lifecycle fund audit. The compliance gap is not a final year discovery. It is a capital planning input that must be quantified early enough to secure funding and plan remediation.
Commission an independent compliance gap analysis
Separate from the condition survey, the authority should commission a specific assessment of every area where the current statutory requirements exceed the original contractual specification. Fire safety, water hygiene, asbestos management, electrical safety, energy performance, and any sector specific requirements such as CQC standards for healthcare or DfE requirements for education. This analysis quantifies the compliance gap and gives the authority a capital budget figure before handback occurs.
Assess the change in law provisions
Review the contract’s change in law clauses with legal advisers. Determine whether any of the regulatory changes since financial close trigger the change in law mechanism and whether cost sharing applies. This is a legal assessment, not a commercial negotiation. It establishes the authority’s contractual entitlements before the handback negotiation begins.
Build the compliance gap into the post PFI financial model
The capital cost of closing the compliance gap must be included in the authority’s post PFI operating model. Without it, the insource or reprocure business case is understated. Article 9 of this series examines the full financial modelling requirement for the post PFI operating environment, including the VAT and pension dimensions most authorities have not modelled.
Do not assume the SPV will fund it
The SPV’s contractual obligation is to the specification agreed at financial close. Unless the change in law mechanism clearly allocates the cost to the SPV, the authority should plan on the basis that the compliance gap is its own capital liability. Planning for the worst case and being pleasantly surprised is a better commercial strategy than assuming the best case and being caught short.
Treat compliance as a board level risk, not an estates issue
The compliance gap at PFI handback is legal risk, financial risk, governance risk, and reputational risk. It is not a technical issue for the estates team to resolve alone. Senior leadership must understand the scale of the exposure, the capital cost of closing the gap, and the timeline required to address it. An authority whose board first hears about the compliance gap during handback negotiations has lost the ability to plan for it.
At PFI expiry, the most dangerous assumption is believing that maintained means safe. It often does not. The contract may describe yesterday’s obligation. The law defines today’s responsibility. And the bill for the difference usually arrives at handback.