Complications of practical completion

Practical completion of works is often the trigger for other events, such as the grant of a lease. In that scenario, a landlord carries out works in accordance with a planning permission and specification pursuant to a building contract. When the works are practically complete in accordance with the building contract, the landlord will grant and the tenant will accept the lease. 

However there are inherent tensions in the matrix of contracts required by such an agreement. The building contractor employed by the landlord wants to achieve practical completion quickly to avoid damages for late completion. In addition, building contracts often allow the employer (landlord) to retain 5% of the value of the works during the course of construction, and typically half of that is released to the contractor on practical completion. The contractor is motivated to call for practical completion with a snagging list: items to be settled shortly after practical completion. 

By contrast the tenant tends to want space ready to start fitting out or using, without contractors coming in to finish the job. This could be for logistical reasons – easier to fit out if there is only one set of builders in the premises – or because the tenant has a full repairing lease, and does not want to start that by putting right works which should have been done by someone else. The landlord is motivated to ensure that there is only one practical completion. If the builders say they have completed, and the tenant disagrees, the landlord may be in a position where they have to pay the builders more to carry out works the tenant insists are needed. The tenant might be allowed to end the agreement for lease if practical completion has not been achieved by a specific date.

Tenants can be surprised to find that practical completion can take place even where there are latent defects and minor works remain undone. An element of discretion remains in connection with very minor items of work left incomplete on de minimis principles. Patent defects and outstanding construction work are not consistent with achieving practical completion. It is also worth bearing in mind that the quality of the works can be just as relevant as their extent when trying to work out whether practical completion has been achieved. Is the building fit for occupation?

Over the years solicitors have tried many ways to formulate practical completion. The challenge is increased by the seemingly inevitable need for some design changes to be made in the course of building works. Minor snagging items are consistent with practical completion. But do a large number of minor items together become major? How does one define ‘substantial’ or ‘material’ amendments to the works without saying ‘insubstantial’ or ‘immaterial’? An alternative approach could be to improve tenant protection, by providing the right to inspect, to comment on whether practical completion has been reached, and to provide collateral warranties from third parties involved in the works. Finally, in new buildings one often sees a target size with some degree of tolerance. If the space is too big, perhaps the rent is capped at the intended size, or the tenant can rescind the agreement. If the space is too small, the tenant may not be able to use it for its intended purpose.

Sometimes the dimensions are critical, as in Mears Ltd v Costplan Services (South East) Ltd [2018] EWHC 3363 (TCC). In that case the contract was to build student accommodation, and the agreement with the landlord specified that rooms could not be more than 3% smaller than shown on the drawings attached to the agreement for lease. A change in area of more than 3% was defined as a ‘material’ change in the agreement. Some 50 rooms were built smaller than shown, apparently because the site itself meant the planned modular construction approach had to be modified.  The tenant sued both the landlord and its agent under the building contract, seeking a declaration that practical completion had not been achieved.

The judge noted that deeming a change of more than 3% to be ‘material’ was intended to narrow the scope for disputes. However on the wording of the contract, a material variation to the works did not automatically mean there had been a material breach of contract. These were two different concepts.  The tenant’s contention was that the failure to build to the correct dimensions was a condition of the contract, in the strict legal sense – that is, expressly or impliedly of sufficient importance that any breach of it would entitle the innocent party to treat themselves as discharged. This was a step too far – if only one bin store had been too small, the tenant would have been able to walk away from the contract. The judge felt this would be commercially absurd, though he noted the tenant would not be able to charge as much rent for student rooms which were too small. The fact that the breach of contract could not sensibly be remedied was not relevant to practical completion.

In considering whether a breach is material, it is important to consider the breach in context, that is to say, ‘material to what?’. The size of the property, its purpose and usefulness are all factors. 

This trial was an expedited one on the preliminary issue of whether the material change precluded practical completion.  

As the trial was expedited, the judge did not hear full arguments on all the issues and was asked to make declarations rather than order a remedy. This meant that he noted remedies available, such as damages. It was also possible, on the wording of this agreement, that the size of the rooms would fall within the definition of inherent defects, to be remedied by the landlord. A claim could be brought under the warranty provided by the building contractor or by the employer’s agent – no finding was made on whether the warranties had been breached or not. Finally, any certificate of practical completion can be challenged in court. I suspect the outcome of the expedited trial satisfied none of the parties.

Note that there was only one practical completion here. The lawyers drafting the contact had made sure that practical completion in the building contract was also practical completion in the lease. Often it is only hindsight that illustrates whether or not the drafting was as clear as intended. 

Suzanne Gill is a partner at Wedlake Bell