Concurrent liability in building defects

Napthens - October 2nd 2018

A recent TCC (Technology and Construction Court) case highlights the inherent difficulty of dealing with concurrent liability for defects in a building involving a developer, tenant and contractor.  The case provides a useful review of the legal position and difficulties that arise when a tenant has a full repairing lease but the contractor is liable to both the developer (under its building contract) and a tenant (under its collateral warranty) for the same defect.

Office Depot International (UK) Ltd v UBS Asset Management (UK) Ltd deals with a developer/landlord, UBS, who sued its contractor for defective roofing works and recovered a substantial amount of money by way of settlement with the contractor.  However, the developer made the decision not to use the money to fully repair the roof, leaving the tenant with not only a defective roof, but also a liability under its full repairing lease.  To complicate matters further, the developer had included an indemnity within its settlement agreement with the contractor that stated the developer would indemnify the contractor against any claims from other third parties, i.e. if the tenant were to bring a claim against the contractor under its collateral warranty.  Due to this indemnity, the developer resisted enforcing the full repairing covenant within the lease until the tenant’s collateral warranty was coming up for expiration (after 12 years) as it knew the tenant would bring an action against the contractor who would in turn invoke the indemnity.

The seriousness of the implications of this scenario depends on whether you are a developer, a tenant or even contractor.  As a collateral warranty beneficiary, the tenant may also find themselves in a position where a no greater liability/equivalent defence clause within its collateral warranty with a contractor would actually inhibit the tenant from recovering costs of the defective roof, in any event.

There is the option that the tenant could argue that the developer had been unjustly enriched and therefore would be prevented from enforcing the covenant under its lease, but this was not done in the current case and has not been tested in court.

Obviously the developer is not showing their best colours in this scenario but it is a realistic and commercial situation that could arise on a development and it is therefore important to ensure a tenant’s position is protected as much as possible under its contracts with the developer to avoid such a situation arising.

If the above sounds like a situation you're experiencing, get in touch and we'll make sure you have the right advice.