Collateral warranties: getting the best support!


Author: Oliver Tobin


Oliver Tobin, Associate, Fladgate LLP (otobin@fladgate.com)


 

Many occupiers still fail to sufficiently protect their interests by ensuring that the appropriate paperwork is in place when construction works are carried out in or adjacent to their premises.  Whilst many defects continue to be identified and remedied when a contractor is on site, significant problems can and do arise with latent or hidden defects.  Issues such as water ingress, damp or fire stopping works, among others, may not become apparent in some cases until many years after the original works were carried out.

When defects do arise from construction works, tenants should not assume that they will always be able to recover from their landlord under the terms of the lease.  This point can be illustrated by the well-known case of an upmarket lingerie company in a dispute with its landlord over damp-proofing works to basement premises[1].   The tenant claimed the premises were unusable because of damp, moved out and subsequently brought proceedings for breach of repairing covenants.  In response, the landlord counterclaimed for unpaid rent.  Whilst both parties’ experts in the subsequent court proceedings agreed that the damp resulted from a failure of the damp-proof membrane, aggravated by a burst water main, the court held that the landlord was not liable for the costs of repair.  Although the damp-proofing was defective, the landlord was only required under the lease to maintain the premises in the state they were in when demised.  The defect had caused damp but not a deterioration of the structure.  The fact that the tenant was suffering loss of amenity was not of itself evidence of structural disrepair.  Not only did the tenant lose its claim but the landlord succeeded in its counterclaim for recovery of unpaid rent.

The tenant in this case might well have had an alternative claim against the contractor that carried out the inadequate damp-proofing.  However, such a claim would only have succeeded if the tenant had been the beneficiary of a collateral warranty or third party rights from the contractor.  Such means provide a link between a tenant and a contractor and provide the basis for claims in contract.  Non-contractual claims are often frustrated by the principle that damage to a building attributable to a defect in the structure is not recoverable in tort.  Such claims are known as pure economic loss, as the loss sustained is that too much was paid for the property[2].

To prevent problems arising from construction works, when taking over a lease a tenant should ensure that it is the beneficiary of third party rights or a collateral warranty.  Either option is suitable but many beneficiaries still prefer to have a collateral warranty signed by the contractor upon which they can rely.  A collateral warranty is a separate agreement that sits alongside the original contract and provides contractual remedies to third party beneficiaries who would not otherwise possess such rights.   A beneficiary may rely on a warranty if it cannot, or does not, wish to pursue the original party to the contract.  Beneficiaries of warranties are usually purchasers, tenants and funders.  A warranty provides remedies to a beneficiary for any failure by the contractor to carry out the contract works, with the contractor expressly promising to perform the works and services.  Other provisions are also common dealing with issues such as insurance and prohibited materials.

Collateral warranties have often been notoriously difficult to obtain once construction works have finished and the contractor has been paid.  However, where there is a contractual obligation to provide collateral warranties, the courts are now adopting a robust approach in ordering specific performance even when a project is long complete.  In a recent case[3], a consultant was ordered to execute a collateral warranty that was requested six years after the works completed.

Tenants mistakenly assume that problems with construction works can be recovered against their landlord under the repairing obligations in the lease.  However, as in the case referred to above the lease may not permit such a recovery.  Tenants should therefore ensure that their interests are adequately protected and that they actually obtain any third party rights or collateral warranties which they were promised.  Collateral warranties should then be retained in a safe place, as tenants may not have to rely on their terms until very many years after the works are completed.


[1] Janet Reger International Limited v Tiree Limited [2006] EWHC 1743 (Ch)

[2] Murphy v Brentwood [1991] UKHL 2

[3] Kier Construction Limited v WM Saunders Partnership LLP [2016] CSOH 17


 

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