Never overlook construction documents

In a series of articles, Leigh Child, Senior Associate in the Construction team at Napthens, looks at the importance of construction documents underpinning a commercial development from both the perspective of the developer, and starting with interested parties such as purchaser, tenants and funders.

Whether you are a prospective purchaser of a new commercial development, or a commercial tenant interested in leasing recently constructed premises, it is important not to overlook the construction documentation in place to build the new property when carrying out your pre-contract enquiries.

This construction due diligence is also used by funders of acquisitions as a way of ensuring the premises they will have a legal interest in, have not only been constructed properly but that there is adequate provision in the construction documents providing direct security to them.

A buyer’s solicitors will want to request copies of all relevant construction contracts which commonly include a main building contract (and any key design subcontracts), appointments for key professionals such as architect, engineers, quantity surveyor (or similar) and any contract administrator, or employer’s agent (as relevant).

In simple terms, robust and properly prepared construction documents should ensure a well-designed and good quality build. This is done through appropriate clauses dealing with standards of care, design, and quality of materials as well as health and safety compliance not only through the construction phase but also in the finished property. A thorough review of the construction documents will highlight where there may be areas of concern about the quality of build or alternatively, if properly drafted, they provide additional comfort that the build and design of the premises is more likely to be sound.

Within these contracts should be obligations by the construction team to provide either collateral warranties or third party rights (and sometimes a mixture of both) in favour of any purchaser or tenant as well as their funder, if needed.

These security documents will contain important provisions which can be directly enforced by the beneficiary (the tenant, purchaser or funder). Such provisions tend to cover issues such as intellectual property rights granting a licence allowing use of the construction documents. This may be important if the new owners want to carry out their own works on the property. There should also be obligations around maintaining professional indemnity insurance, which is key to meeting any financial liability for inadequate design, or advice – without this insurance, any financial liability would need to be met directly from the defaulting company’s own money which may very well be insufficient to cover any losses. The most important provision however is the right of the beneficiary to enforce the original contract to which the collateral warranty is well, collateral.

The collateral warranty creates a direct contractual link between the interested purchaser or tenant and the building contractor, professional or subcontractor so that if a subsequent design or work defect becomes apparent, the beneficiary can sue for breach of contract enforcing the original construction document. This therefore brings us back to the importance of the content and form of those construction documents. If there are limitations on liability within those contracts, it is key that they are known from the outset.

Whilst the construction documents and security provided are important for any due diligence exercise, if you are a commercial property developer, it is easy to see how the quality and content of your construction contracts could affect your ability to sell or lease new build premises.

In the next edition, Leigh will be considering the form and content of building contracts and how to ensure they will maximise your opportunity to dispose of your development.