Developers' liability

It was a developer’s nightmare: all 94 properties on their estate were affected by inadequate foundations. Shortly after construction the owners were reporting that because of cracking the properties were unsaleable, difficult or impossible to mortgage and they could not obtain any insurance against the risk of subsidence.

What went wrong?

The estate was built on a former landfill site in the North-East of England, and the properties had piled foundations. Following a court case Encia (the piling contractor) was found liable for failure to exercise reasonable skill and care in the design and construction of the piles. The developer, Shepherd Homes, bought back five of the properties, re-piled 20 and planned to re-pile another ten. In the latest litigation ten other properties were considered. These suffered from a variety of internal and external cracking and sagging of floors. The judge said that on inspection the cracking looked minor, but accepted that it had blighted the whole estate.

Claims against the developer

• NHBC Build Mark policy: the developer argued that for one of the properties the owner had not given notice in writing as required. The judge treated this sympathetically. The owner had gone to the site office to complain about cracking at the junction between the ceiling and wall in some of his rooms. He had been given tape to cover up the cracks and some paint. The judge said that because the developer was already aware of defects generally and it was likely that some record had been made of this visit to the site office, that would satisfy the requirement to notify in writing.
• Defective Premises Act: the judge held that the actual damage did not make the properties unfit for habitation but said that any significant defects in the foundations, as in this case, satisfied the criteria for the lack of fitness for habitation.
• Contracts for sale: these provided that the works were to be completed in a good and workmanlike manner. The judge said that this requirement covered all the works, and not just those carried out after the contracts were signed. He also said that this phrase included both design and workmanship. That was implied in the wording and was not excluded by the “entire agreement” clause. The developer’s attempts to restrict liability by their interpretation of the relevant clauses in the contracts for sale were held to be unreasonable under the Unfair Contract Terms Act in any event, and therefore unenforceable.

What losses were recoverable?

The claimants said that they were entitled to the re-piling costs so that their properties would have a certain future and could be sold on in the normal way. This argument was rejected because although the cracking was significant it was still very fine cracking and there was a low probability of significant future movement. The claimants were awarded compensation for the diminution in value of their properties and the costs of repairing the cracking, which may need to be repeated occasionally until settlement finally ceases in around 20 years’ time.

For some properties damages were awarded on the basis that the properties were not mortgageable, i.e. a satisfactory engineer’s report could not be provided to the mortgage lender.

A small amount was also allowed for distress and inconvenience, based generally on £150 per owner per year. This covered not only the inconvenience caused already but that which would be suffered when the properties were re-pointed etc in future years.

What this means for you

If you are unfortunate enough to find yourself in this kind of situation, this case is not good news. The court was obviously sympathetic to the innocent owners and tried hard to find a remedy which gave them some compensation. The entire agreement clause in the contract for sale did not give the developer the protection it may have expected. For construction on difficult ground, such as a former landfill site, it may be worth taking extra steps to check that the design is adequate: prevention is far cheaper than cure.

Gillian Birkby, partner, Fladgate LLP (gbirkby@fladgate.com)