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Legal view: Buyer beware?

To what extent are contractors responsible for repairing defective premises? We examine a recent case

What does a recent case involving a dispute between a landlord and a care home company tell us about pharmacies’ responsibility for repairing defective premises? By Patricia Nathan-Amissah, Associate, Charles Russell Speechlys LLP

Pharmacy tenants should be aware that after completion of new construction works – whether it is a new build or an internal refit – there may still be defects caused by failures in design, workmanship or materials.

There are two categories of defects that can appear before or after completion of the works:

  • Patent defects are apparent and can be seen and obvious, and should be remedied if they appear before practical completion
  • Latent or inherent defects may take many years after completion of the project to manifest themselves and may be difficult to find.

Patent defects will usually be dealt with by the contractor under the building contract. However, latent defects may give rise to disrepair in the premises over the term of the lease.

With soaring inflation, construction costs are increasing month on month. This means that dealing with defects can be costly for the paying party, especially where they are discovered after completion.

Under pharmacy leases, you as the tenant may be responsible for remedying defects under a full repairing and insuring lease. Even if a lease only covers part of the building and the landlord is responsible for keeping the structure and common areas in repair, it is likely the tenant will pay their share of the cost of any repairs through the service charge.

Where lease exclusions cannot be negotiated, you should look at warranty protection in the form of collateral warranties (or alternatively, third party rights) from your professional team, contractors and sub-contractors if available.

Until now, it was thought that collateral warranty contracts provided a right to litigation – a costly and lengthy process.

However, collateral warranties did not provide an immediate remedy, even when successful. A recent case has opened the door to a faster, cheaper and simpler dispute resolution process in the form of adjudication.

Adjudication under tenant collateral warranties

A contractual remedy against those responsible for the defective work may be sought through negotiating with the landlord to obtain written direct contracts called ‘deeds of collateral warranty’ from the contractor, architect and engineers involved in the construction of your premises.

These set out that a contractor or design consultant will acknowledge a duty of care to you as the named beneficiary in relation to the relevant works or services provided. 

Collateral warranties are more commonly available to tenants of an entire building than to those only leasing part of a development. Nonetheless, it is worthwhile insisting on these if you are unable to agree with your landlord to exclude liability for repairs from your lease.

Abbey case

A recent case confirms another benefit of collateral warranties. On 21 June 2022, the court of appeal decided in the case of Abbey Healthcare (Mill Hill) Limited and Simply Construct (UK) LLP whether a collateral warranty relied on by Abbey (the tenant operating a care home) was a construction contract within the meaning of the 1996 Construction Act.

If it was, then there was a statutory right to adjudicate. If it was not, then the adjudicator had no jurisdiction without both parties’ agreement.

In 2020, an adjudication took place when Abbey Healthcare sought the recovery of damages from Simply Construct as a result of defects and required remedial works to its premises.

After considering the specific wording of a collateral warranty entered into by both parties – which was typical of lawyer-drafted warranties currently on the market – the court of appeal decided that the Abbey Collateral Warranty was a construction contract as defined in the Construction Act.

This meant Abbey had the statutory right to bring an adjudication as provided for under the Construction Act.

Adjudication benefits for pharmacies

Adjudication is often favoured in the construction industry as it leads to swift dispute resolution while allowing the commercial relationship between the parties and the building project to continue. It has been described as a ‘pay now, argue later’ mechanism.

While the Abbey decision has overnight provided beneficiaries of compliant warranties with a quick and cost-effective dispute resolution mechanism through adjudication, it has also greatly increased the exposure of the construction team to potential adjudications.

Adjudication is faster and cheaper than traditional arbitration and litigation, which a warrantor’s insurers will be aware of.

The delays and costs of litigation may make it too expensive to pursue, which points to adjudication as an alternative means of pursuing the contractor, architect and engineers involved in the construction works. This could mean the costs of the work could be decided on quickly to fund the works or reimburse the costs expended.

It is worth dusting off any existing collateral warranties as they can provide a remedy for defects. It may be that collateral warranties will become more difficult to negotiate in the future when entering a lease. The wording of the collateral warranty will need specialist advice to see if you have a statutory right of adjudication where the collateral warranty is silent.

You should be wary of being offered the equivalent third party rights as they are not currently considered to benefit from the right to adjudicate, unless there is an express written provision included within the third party rights.

The above is a general overview. We recommend that independent legal advice is sought for your specific concerns.

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