What type of defect can prevent “practical completion”?
In Mears Ltd v Costplan Services (South East) Ltd & Ors 2019 EWCA Civ 502, the Court of Appeal provided guidance on the meaning of “Practical Completion” for the first time in 50 years. But is the position any clearer?
Facts
Mears, a provider of student housing, entered into an agreement for lease (“AFL”) for a 21-year lease of two blocks of student accommodation to be constructed in Plymouth. Costplan was appointed as Employer’s Agent. Under the terms of the AFL, the lease would become complete within five days of the blocks’ practical completion (“PC”). If PC did not occur before the longstop date, Mears were entitled to terminate the lease.
In the event, the works were significantly delayed, and it transpired that there were various defects in the blocks, including that some of the rooms had been built more than 3% smaller than had been stipulated in the AFL. The maximum tolerance was 3%, as stated in Clause 6.2.1 of the AFL:
“6.2 – The Landlord shall not make any variations to the Landlord’s Works or Building Documents which…
6.2.1 – materially affect the size (and a reduction of more than 3% of the size of any distinct area shown upon the Building Documents shall be deemed material), layout or appearance of the Property…”
Mears argued that, since several rooms had been built smaller than the 3% tolerance, there could be no PC. This meant PC not occurring by the longstop date, which entitled Mears to terminate the contract. In determining the dispute, the court had to examine whether or not PC had occurred.
Decision
Mears sought a declaration that PC could not be achieved where there were material or substantial defects. At first instance in the Technology and Construction Court, the court declined to grant this declaration. Although accepting that 56 rooms had been constructed in breach of the 3% tolerance range, the court held that the failure to construct the rooms within the 3% size tolerance was not a sufficiently material or substantial breach of the AFL to enable Mears to terminate due to PC not being achieved. The court held that PC depends on the extent of work done but also its quality; thus patent defects can prevent PC occurring, but this depends on the nature, extent and consequence of the disconformity, and even an irremediable breach may not prevent PC occurring.
Mears appealed the decision, on the basis that the 3% tolerance was expressly stated in the AFL as a “material” breach, which meant that PC could not occur and Mears should be able to terminate the contract. However, the appeal was dismissed, and the decision at first instance was upheld.
The court agreed that Mears’ statement that PC could not be achieved whilst there were material and substantial defects was “relatively uncontroversial”. However, whether the existence of defects will prevent PC occurring is a matter of ‘fact and degree’, and a defect that is ‘trifling in its extent or consequence’ may not do so. The fact that the defect in question is irremediable is irrelevant to this.
Specific guidance on PC
Lord Justice Coulson’s judgement provides helpful guidance on PC in general. He said:
• PC is itself difficult to define and there are no hard and fast rules.
• The existence of a latent defect will not prevent PC, because by its nature it is unknown.
• It makes no difference whether the ‘defect’ involves an item of work not yet completed or one that has been completed but is defective; these are treated in the same way.
• The existence of patent defects will be sufficient to prevent PC, save where they are trifling in nature, extent or effect.
• The ability to use the works as intended may be a factor in considering whether a patent defect is trifling (for example, in this case the fact that the rooms were 3% smaller did not prevent the rooms from being used as student accommodation). However, this will not necessarily be determinative as to the position on PC.
• The mere fact that a defect is irremediable does not mean the works are not practically complete. The question remains whether the defect is trifling.
Comment
This case provides useful guidance on PC, which is a term often not defined in construction contracts. The important point is that a patent defect may prevent PC, in the same way as incomplete work, but not if that defect is trifling, which will be a matter of ’fact and degree’ depending on the nature, extent or consequence of the defect.