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That's not what I wanted - a case of a tenant not getting the building they expected and how you can avoid falling into the same trap
- AuthorTom Pemberton
For anyone commissioning or providing construction works, whether in a commercial, residential or shared infrastructure context, it is essential that the contract properly defines the works which must be delivered. This may seem obvious but the courts recognise that a building is not like a car or precision instrument which must be built exactly in accordance with the specification with no deviations at all. Where the standard JCT completion provisions apply without amendment, the extent of the deviations and snags which can be tolerated will be largely a matter for the discretion of the contract administrator/certifier.
In the case of Mears Limited v Costplan Services & Others (2019) the Court of Appeal held that the drafting needs to be very clear to over-ride the standard JCT completion provisions. (In this case the contract in issue was an agreement for lease rather than a JCT contract, but the principles are the same.) Mears Limited (“the Tenant”) had entered into an agreement for lease (“the AfL”) with Plymouth (Notte Street) Ltd (“the Landlord”), in which the Tenant agreed to take a 21 year lease of a property owned by the Landlord following its conversion into student accommodation in accordance with plans and specifications attached to the AfL (“the Landlord’s Works”). One of the terms of the AfL was that the Landlord must not make any variations to the Landlord’s Works which materially affected their size. A reduction of more than 3% of the size of any distinct area shown in the plans was expressly deemed to be material.
The evidence indicated that 56 rooms were constructed outside of this tolerance. This was not in dispute for the purposes of the appeal. This focussed on the following issues of principle:
- Could the Tenant terminate the AfL on the basis that the Landlord was in material breach?
- On the proper construction of the AfL, could practical completion be certified when there were known material or substantial defects or breaches of contract?
The Court of Appeal held that the parties could agree that a breach of a particular clause amounted to a material or substantial breach of contract. However, it held that the parties did not do that in this case. While the parties agreed that it would be a breach of contract if there was a reduction of more than 3% of the size of any distinct area, the words “material” and “materially” in the relevant clause related to the size of the rooms, not the nature of the breach. In the leading judgment, Coulson LJ stated that if the parties were taken to have agreed that any failure to meet the 3% tolerance, no matter how trivial, amounted to a breach of contract, it would have led to an uncommercial result, since it would have meant that one trivial failure to meet the 3% tolerance would allow the Tenant to determine the AfL. Coulson LJ further stated that clear words would be necessary for such a draconian result and there were no such words in the AfL.
On the second issue of whether practical completion could be certified where there were known material or substantial defects or breaches of contract, the Court of Appeal summarised the law as follows.
1. There are no hard and fast rules and practical completion is easier to recognise than define.
2. The existence of latent defects cannot prevent practical completion. This is self-evident since by definition if the defect is latent, nobody knows about it and it cannot therefore prevent the certifier from concluding that practical completion has been achieved.
3. In relation to known defects (i.e. patent defects), the cases show that there is no difference between an item of work that has yet to be completed (i.e. an outstanding item) and an item of defective work which requires to be remedied. The Court of Appeal recognised that snagging lists can and will usually identify both types of item without distinction.
4. Whether or not a departure from drawings is trifling is a matter of fact and degree, to be measured against 'the purpose of allowing the employers to take possession of the works and to use them as intended'. At least in the first instance, this was a matter for the discretion of the contract administrator/certifier.
The Court of Appeal held that the parties can agree parameters by way of express contract terms to guide and control certifiers but they did not do that here. The Court accordingly declined to make the declarations sought by the Tenant on the issues of principle. This is not the last word, since the neither the Technology and Construction Court (the court of first instance in this case) nor the Court of Appeal was asked to consider the particular facts of the matter, beyond that some room sizes did not meet the required tolerance and therefore the Landlord was indeed in breach of the AfL. The Tenant may therefore still pursue a challenge through the courts against the decision by the contract certifier/administrator (Costplan Services, the first respondent in the case) to issue a certificate of practical completion on the facts of the case. However, in view of the law summarised by the Court of Appeal which governs the exercise of the contract certifier/administrator’s discretion, the outcome of such a challenge could not be predicted with any certainty.
The Court of Appeal’s judgment reinforces the principle that it is vital to make a contract clear if a specific result is intended. Unless the words of the contract are very clear as to the level of deviations and snags that will be tolerated, much will depend on the discretion of the certifier in the first instance. Mears showed that this is not under the parties’ control and the outcome can therefore be unpredictable in the absence of clear contract drafting.
The lesson for employers under building contracts and tenants under agreements for lease is that if they intend to make the achievement of specific parameters (such as the 3% tolerance stated in the AfL in Mears) a condition of practical completion and/or handover, or failure to achieve such parameters grounds for termination, this must be expressly stated in the contract.
The lesson for developers and contractors is they must fully understand the nature of their contractual obligations. If, for example, there is an extended definition of “Practical Completion” which makes it clear that this will not be certified unless the works are constructed within very narrow tolerances, they must fully allow for this in their price and programme and take appropriate precautions in the build process.
Please visit the Construction section of our website for more information.
This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.