Follow the agreement

If the provisions of an agreement aren’t followed, developer’s release from liability can’t be relied on

We are all familiar with architects and contract administrators certifying practical completion under building contracts. Often there are mirror provisions in agreements for lease, development agreements and funding agreements relating to practical completion and making good defects, with associated inspection procedures. What happens if these mirror procedures are not followed? Can this leave developers exposed?

Apcoa v Crosslands is a recent Scottish case about liability for defects in a multi storey car park. The decision is not binding in England and Wales, but is a good example of how provisions of an agreement for lease or development agreement need to be followed if a developer is to rely on a clause within that agreement releasing it from liability.

Under an agreement for lease Crosslands agreed to build a car park for Apcoa. The agreement had the usual obligations including a requirement to build the car park in the appropriate manner. It gave Apcoa the right to attend practical completion and defects inspections and to make representations as to whether PC and defects certificates should be issued under the building contract.

The agreement said that once the certificate of making good had been issued under the building contract, Crosslands would have no further liability in relation to the works.

The works were completed in 2008 and certificate of making good was issued in June 2012. Apcoa was not, however, given notice of the defects inspection and was not given the opportunity to make representations as to whether the certificate should be issued.

The waterproof coating on the top deck of the car park failed and significant repairs were required. Apcoa made a claim against Crosslands for the failure and the cost of repair. Crosslands tried to rely on the developer’s release in the agreement for lease which said Crosslands would be released from liability for defects once the certificate of making good had been issued. Apcoa said there had been no final inspection meeting and it had only seen the certificate of making  good after it had started court proceedings.

The court concluded the requirements in the agreement for lease in relation to the certificate of making good were not intended to be optional

The court looked at the parties’ intentions at the time of their bargain and concluded the requirements in the agreement for lease in relation to the certificate of making good were not intended to be optional. Even though the developer release clause did not refer to any preconditions (other than the issue of the certificate of making good), the judge decided the parties could not have intended that Crosslands would benefit from the release in circumstances where it had disregarded the defects provisions. It would otherwise allow Crosslands to benefit from the exclusion of liability for defects in circumstances where it had failed to follow provisions relating to defects which were intended to allow Apcoa to accept Crosslands’ release from liability.

The court held that the failure to comply with the requirements relating to the certificate of making good meant there could be no valid certificate and thus no exclusion of Crossland’s liability. This makes clear that even if the developer’s release is not stated to be conditional upon compliance with the defects inspection regime, the developer will need to comply in order to rely on the release.

Where architects are administering building contracts that have mirror practical completion and defects provisions in associated agreements for lease, development agreements or funding agreements, it should be clear who has responsibility for liaising with third parties and applying those procedures. Care needs to be taken that procedures are followed as failure to do so can have serious ramifications for a developer’s liability.

Angus Dawson is partner at Macfarlanes LLP


 

In plain English
Agreement for lease   

An agreement for lease is an agreement entered into between a landlord and a tenant under which the tenant agrees that it will take a lease of the property at a certain point in time or upon certain conditions being met. Where an agreement for lease is entered into before construction works have begun, or during the course of construction, it will usually include general development covenants requiring the landlord to carry out the works in a good and workmanlike manner and in accordance with an agreed specification and all relevant statutory requirements. Agreements for lease often give the tenant the right to attend and make representations at practical completion and defects inspections. They should not, however, allow the tenant to veto the issue of a practical completion certificate or certificate of making good defects under the underlying building contract. The landlord will often be released from its liability under the agreement for lease following the issue of the certificate of making good defects under the building contract. The Crosslands case shows the risk of not following the relevant procedures in the agreement for lease and the landlord retaining a liability it thought it had been released from.