Generally when we purchase cars, home entertainment systems and other high value or complex goods, we do not expect there to be any faults in them and, in the unlikely event that problems do occur, we usually have a robust guarantee to call upon in order to get the problem resolved. However, there appears to be an implicit acceptance that when you buy newly or recently constructed buildings, there will be defects and there is no guarantee that these will be resolved without significant expenditure by the owner. Indeed, standard form construction contracts anticipate that there may be defects to a value of 1.5% or more of the original contract value – this is reflected in the defects rectification and retention provisions of such contracts.
Whilst most defects are likely to become apparent within the first five or so years after construction, it is certainly not always the case, and significant defects may only come to light many years later. Some in the construction industry consider that the risk period during which such latent defects might emerge is 10 or 12 years, after which it is considered unlikely (although not impossible) that such defects may appear. It is partly for this reason that insurance policies covering such defects, or recourse under collateral warranties from the original construction team (the contractors and professional consultants), tend to limit their cover to 10 or 12 years.
What should be done when defects arise?
An obvious first step is to consider whether the party who has discovered the defects is liable for the cost of rectifying the defect that has become apparent. For example, in the case of landlords, it may well be the tenant's responsibility to rectify the defect under a full repairing and insuring lease. If the landlord still wishes to take the lead in arranging for the necessary repairs, it will wish to ensure that doing so is without prejudice to its rights under the lease and will ideally agree with the tenant that the tenant will meet the costs of resolving the defect.
It is likely that tenants under a full repairing and insuring lease will be responsible for rectifying the defect at their own cost in the first instance. However, it is always worth verifying this assumption as there is a limited chance that there has been an exclusion from the repairing obligation (for example if collateral warranties were not available in relation to certain elements of the construction). Tenants should also consider the extent to which the defect is exclusive to their demise or whether it affects other tenants or the common parts in order to formulate and implement a suitable remediation plan.
If a party does have a liability for rectifying defects, the next stage is to consider what rights of recourse it may have. For example, are there any residual obligations owed to tenant or purchaser by the original developer or seller of the property? The original developer may owe continuing obligations to procure the making good of defects at no cost to a tenant or purchaser during the relevant rectification period (usually 12 months after practical completion of the building).
If there are no such residual obligations then it is worth investigating whether (i) there is any recourse to the construction team responsible for designing and constructing the building; or (ii) there is a potential claim under an insurance policy for the building (such as a latent defects insurance policy).
Rights of recourse to the construction team
Generally speaking, to have rights of recourse against the original construction team, a party must have a contractual link with the team (whether as employer under a building contract or professional appointments, or as a beneficiary under a collateral warranty).
The employer under the original building contract and professional appointments is likely to have rights of recourse to the construction team for any latent defects due to defective design, workmanship or materials. It is important to note, as a general proposition, that the issue of a certificate of practical completion or the expiry of the defects rectification period will not themselves bar a claim, except in some limited circumstances where the defects were known about at the point that the practical completion or completion of making good certificates were issued.
Beneficiaries of collateral warranties are, of course, one step removed from the construction team. This means that claims may be harder to raise and sustain (e.g. because the beneficiary does not have access to all of the documents relating to the project and may not have been involved in the key decisions and instructions).
Also, it will not be sufficient just to hold the collateral warranty – the beneficiary will need full copies of the underlying building contract and professional appointments, including all technical requirements and scopes of service. These documents will be required to establish that the defect is in fact the result of a failure to comply with or meet the relevant specification, drawing or other technical detail in the building contract by the original contractor; or to show that the provision of services by the professional team has been deficient in some way. If the beneficiary does not hold copies of these items, it may have the ability to request them under the copyright licence granted in terms of the collateral warranty, but clearly it is better to have the documents from the outset.
Inevitably, raising a claim for breach of contract under a collateral warranty, building contract or professional appointment is expensive and the potential costs of raising an action have to be weighed against the likelihood of success, and the level of recovery that may be made before starting the process. As an initial step, before doing anything else, it is worth checking that the relevant consultants and contractors are still in existence. This can be done relatively quickly and at no cost by, for example, checking the Companies House website for companies or limited liability partnerships (although be careful as such checks may not be absolutely up-to-date).
Prior to raising a formal claim against the construction team, it is certainly worth exploring the scope for remedying the defect in a consensual manner. For example, if there has been a clear breach of the building contract, and a latent defect has arisen, the building contractor may be willing to come back to the site, investigate the issue and implement a solution to avoid the threat of a formal claim. It is a tactic that often produces a positive response at minimal cost. Of course, if the defect arises during the rectification period, then the original employer under the building contract will most likely also have the right to formally instruct the contractor to rectify the defect.
It may be that there is a latent defects policy in place. This is an insurance product that will respond to certain latent defects in buildings. Typically a latent defects policy will apply for the first 10 years after construction.
There are some drawbacks with such policies – for example any claims made are subject to a deductible or excess; liability is capped at the sum insured, is subject to the exclusions in the cover provided (often excluding consequential losses and mechanical and electrical elements of the building) and is dependent on the general issues surrounding insurance contracts including disclosures made at the time the policy was obtained (and indeed it may be the case that the party seeking to rely on the policy is not the party who took out the policy in the first place and that completed the disclosure form).
Nevertheless it is always worth considering whether a policy of this type may be available to meet at least some of the costs and losses caused by latent defects.
Defects in commercial property inevitably impact on the occupier's business and the investment value of the property and can quickly lead to disputes. The key for any party discovering a defect is knowing what responsibilities are owed by it to others for defects and investigating the options that are open for resolving the defect. It may be that there are a variety of options (including obligations owed by developers, insurance policies and collateral warranties) that can explored to decide which is the most appropriate route to getting the defect fixed as quickly, efficiently and cheaply as possible.