The decision of the Technology and Construction Court in Mears Limited v Costplan Services (South East) Limited & Others, recently upheld by the English Court of Appeal, provides some helpful definition of a key but generally undefined term used in construction contracts and highlights the commercial tensions which often surround the certification of practical completion.
Developer sellers or landlords will be keen to trigger sale and lease completions at the earliest possible time. Likewise, contractors will wish to avoid any delay in certification which may result in the application of liquidated damages against them.
Conversely, purchasers and tenants will want defect-free buildings fit for beneficial occupation as intended or, as in the recent case, may seek to delay or avoid purchase or lease obligations where the business reasons for entering into Agreements for Lease or Purchase have since changed.
Circumstances of the case
Mears had agreed by an Agreement for Lease (AFL) to take a 21-year lease of student residences to be constructed by a developer/landlord.
In terms of the AFL Mears was obliged to enter into the lease within 5 working days after practical completion (PC) of the buildings. However if PC had not occurred by a long-stop date in September 2018, then Mears was entitled to terminate the AFL and walk away from the obligation to enter the lease.
The building works were significantly delayed. In June 2018, Mears sought an injunction preventing Costplan (the developer/landlord's agent under the relevant building contract) from certifying practical completion of the works. Mears alleged that PC could not be certified because, amongst other things, 56 of the rooms (out of a total of 348 rooms) had been built smaller than contractually permitted
The AFL stipulated that (i) the developer/landlord could not make any variations to the agreed specification of works that would "materially affect the size, layout or appearance of the Property" and (ii) that a reduction "more than 3% of the size of any distinct area shown upon the Building Documents" would be deemed to be material.
It was not in dispute that each of the rooms complained of was 3% smaller than shown on the relevant drawings, nor that it was impossible to remedy this without rebuilding the properties.
However, the court did not accept Mears' argument that this necessarily prevented PC and refused to grant the requested injunction.
Basis for the court's decision
Practical Completion was not defined in either the building contract (a JCT Design and Build Contract) or in the AFL.
The starting point for the court (as set out in the leading judgement of Waksman J) was to examine the law around the meaning of PC which was summarised as follows:
- practical completion is a state of affairs in which the relevant works have been completed free from patent defects other than “de minimis” or trifling items;
- patent defects can be either items of work yet to be completed (i.e. outstanding) or defective works which require to be remedied;
- latent defects do not prevent the works from being practically complete;
- whether or not an item is trifling is a matter of fact and degree to be measured against the purpose of allowing the employer to take possession of the works and use them as intended (and not mere ability to occupy); and
- the mere fact that a defect is irremediable does not mean that the works are not practically complete.
In particular Waksman J noted that:
"… the works need not be in every respect in complete conformity with the contract in order to merit practical completion, provided that any non-conformity is insignificant, a matter which will usually be left to the professional judgment of the certifying entity…";
"Put another way, there will be practical completion if to all intents and purposes the building is complete. So the intent and the purpose of the building is key."
Applying these principles against the AFL terms relied upon by Mears the court decided:
- The AFL applied deemed materiality of room size reduction of greater than 3% to establish a breach of contract under the AFL (i.e. the obligation not to make any variations that would materially affect the size, layout or appearance of the property);
- The AFL did not state that any such variation would be a material breach of contract;
- Such an interpretation of the AFL (that any such breach was a material breach) would lead to a very uncommercial position as the consequence would be that if even a single bin store was built more than 3% smaller than shown on the plans then this would allow Mears to terminate on the basis of a single trivial failure;
- Accordingly it was held that whether any such breach was a material or substantial breach and not an insignificant or trifling matter was a matter for separate consideration based on the facts; and
- Where no evidence was lead as to the impact of the reduction in floor space on the intended purpose of the buildings whether or not any such size reduction was a significant patent defect (or breach of contract) preventing PC was a matter of fact and degree for the certifier at least in the first instance.
In Mears, there were business reasons for seek to delay or avoid its lease obligations. In other circumstances purchasers or tenants may be pressing for certification for business reasons, for example where they are obliged to vacate existing premises or need to be operational to meet seasonal trade requirements.
In all of these circumstances it is helpful if the relevant express contract terms provide clarity, so far as possible, of any material requirements for practical completion. For example, if there is a tolerance for floor area which will impact upon the intended use of the finished building then this should be identified with clear contractual consequences if it is breached.
Further issues can arise where there are discrepancies between the provisions (and/or their administration) related to the works and practical completion contained in an Agreement for Lease or Purchase as against those in the building contract entered into by the developer.
For example, we have seen situations where practical completion of works varied by instruction has been certified under building contracts only for such to be disputed by tenants who have not approved the variations and are demanding completion based on an original specification.
Ensuring that processes under each contract are properly administered and are aligned is essential
Get in touch
If you require advice on practical completion issues or assistance in the preparation of your contract documents please contact our Michael Conroy.