17 January, 2019
A key part of a development agreement is ensuring clarity on what constitutes the practical completion of a project, and for it to cover what happens with any deviation from the specification of the project.
In the recent case of Mears Ltd v Costplan Services (South East) Ltd and others (2018), decided in the Technology and Construction Court, a tenant was concerned that they would be obliged to take a lease if a supposedly completed property differed from the agreed specification.
The brief facts are that the tenant agreed to take a lease of the property that the Landlords were in the process of constructing. The specification was agreed, but is was further agreed that any changes in the build should not "materially" affect the size of the eventual build, and a reduction of more than 3% would be deemed material.
A dispute arose as the Tenant felt that the building breached this "3%" rule, and felt this should prevent the issue of the certificate of practical completion, which would oblige them to take the lease of the property. On an injunction application, the Court agreed that the building was in breach but refused to agree the Tenant could rescind the contract because of this. The reasons given were; firstly, while the judge accepted that the 3% requirement had been breached, he rejected the assertion that it was a contractual condition giving an automatic right to terminate or that such a breach was always repudiatory.
The judge accepted that the property could not be rebuilt and the tenant may be forced to take the lease. However, he pointed to other remedies that the tenant may have, including those under its lease with the landlord, together with collateral warranties from the building contractor and the employer's agent who certified practical completion. Most importantly, the certificate of practical completion itself was not conclusive and could be challenged in later proceedings, possibly allowing the tenant to rescind the lease.
Secondly, the judge commented on the meaning of "practical completion". The Judge clarified that various factors should be considered when considering the definition and drafting of what would be "practical completion", namely (and to paraphrase): -
The works would be practically complete notwithstanding that there are latent defects (those that cannot be immediately identified or are hidden);
The judge added that it may also be relevant to consider:
However, even then there may still be breaches outside those categories that prevented practical completion. By way of example, the judge explained as follows:- "Suppose the roof, while meeting all relevant building regulations etc. and without affecting any of the planning permissions, is made or finished in a way not in accordance with the specification and is of an odd shape with an ungainly and unattractive appearance. Or the external paintwork, while fit for purpose as paintwork is the wrong colour or finish. I would be surprised if that could not prevent practical completion even though the building was fit for occupation."
On the deviation from the specification, this judgment underlines the need for clarity on the consequences of breaching those requirements, especially if it is intended that a tenant should be able to refuse to enter into a lease in such cases.
The judge was keen to emphasise that he was not proposing an exhaustive list for a definition of "Practical Completion" but this gives some additional guidance when parties are entering a contract that is conditional upon the completion of works by one party, highlighting some of the practical steps to consider when establishing when those works could be deemed practically finished.
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