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Latent Defects

The past 12 months have thrown up uncertainties in the structural defect insurance market, with the collapse of Danish insurance broker Alpha Insurance. This has had an impact in respect of both residential and commercial new build properties. In light of this it is worth considering one aspect of commercial property, which is the repair liability questions that Landlords and Tenants face when entering into a lease of a newly built commercial property.

In a standard "full repairing" lease of the whole of a commercial lease a Tenant would usually be liable to keep the property in good and substantial repair and condition. If the leased area was part of a building, then the landlord would usually retain the obligation to repair, with the tenant contributing towards this either by way of a service charge or as a one-off payment. However, what happens if the repair requirement is not one caused by the use of the property, but is an error in the design or build of the property?

What is a latent defect?

A latent defect, otherwise known as an inherent defect, is a defect in the design or construction of a building, or the materials used, which exists on completion of the building works but is not apparent on inspection. Therefore, it is not usually the Landlords fault, but will be one or more of the team of contractors he/she has employed to erect the building.

How can the liability attached to such defects be dealt with in a commercial Landlord and Tenant arrangement?

The nature of the problem is that the defect can't usually be spotted straightaway and so is not obvious. The repair covenant in the lease will usually be drafted so that the Tenant will be liable to repair any damage caused including that by any latent defect, but the liability stops at the latent defect itself. This still leaves a Tenant responsible for some potentially onerous repair work, and so it may be appropriate for both parties to look for ways to limit this liability, particularly if the Tenant is a good covenant and key target for the Landlord.

As part of the initial negotiation a Tenant may expect a "suite" of collateral warranties to be provided by the main construction team (such as an architect, main contractor, sub-contractor, etc). These are agreements which directly and contractually bind the contractors to the Tenant and enables the Tenants to directly pursue the contractors in repairing a latent defect and making good any damages.

However, collateral warranties are only as strong as the companies that provide them, and if a contractor gets into financial difficulty then it would be the underpinning PI insurance that would indemnify against loss. Given the recent issues noted above, it is important for both commercial Landlords and Tenants to check that the PI insurance available provides adequate cover. Where this is not available there are standalone latent defect insurance policies available, the benefits of such are that the policy is assignable and there is usually no requirement to prove fault/negligence.

If collateral warranties or latent defect Insurance is not being offered (and sometimes even if they are) it is not uncommon for a Tenant to seek to vary the lease to exclude liability for disrepair caused by latent defects and remedying the defect itself. It would be important to identify precisely what the parties mean by "latent defect" to prevent future issues in establishing this.

In conclusion, there are almost always going to be conflicting requirements when accepting potential responsibility for repairing faults that are difficult or impossible to identify at the point of the grant of a lease, but there are a range of solutions that can be employed to bring about an equitable solution for all parties, even in a difficult insurance market.

For more information contact Matthew Jones in our Commercial Property department via email or phone on 01254 222316. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

Learn more about our Commercial Property department here

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