Practical completion – easier to recognise than define

The notion of ‘practical completion’ has, however, often proved to be a mercurial concept. The courts have repeatedly described practical completion as easier to recognise than to define. Where it is not defined in the relevant building contract, the courts have shown a willingness to adopt a flexible and pragmatic approach to the meaning of practical completion – with potentially significant consequences for related contracts.

The Court of Appeal has revisited a number of these issues in its recent decision in Mears v Costplan Services (South East) Ltd [2019] EWCA Civ 502.

Background

Whenever there is a dispute about whether or not practical completion has been achieved, it is often only tangentially related to the state of the works. More often than not, it is driven by the fact that one of the parties is seeking to avoid or delay the consequences of practical completion.

Practical completion is, of course, key not only to the employer and the contractor, but also to purchasers, funders and tenants, all of whom may have competing interests in practical completion being achieved, or being achieved at a particular time.

Practical completion is not just relevant to the building contract; it is also a critical milestone in other, related contracts such as agreements for lease, sale agreements, operating and maintenance agreements, project agreements, concession contracts and funding arrangements.

Under an agreement for lease, for example, where the property in question is still being built or is undergoing refurbishment, the achievement of practical completion is a key date that can trigger the lease commencement date and the payment of rent (or a rent-free period).

The agreement for lease may also provide for other consequences, such as allowing a tenant access to carry out tenant’s works, and changing the property insurance arrangements.

More complex arrangements

In more complex projects, funders, tenants and purchasers typically require that, in addition to the works being practically complete, other conditions are met before the obligation to complete on the related contract arises – for example, the provision of further information or documentation, or even signoff of the works by their own inspection teams.

In addition or alternatively, tenants and purchasers might insist on: (i) a right to inspect the works before practical completion is achieved; (ii) a right to make representations to the contract administrator/certifier about the state of the works; and/or (iii) a right to refer the question of whether practical completion has occurred to an independent third party. Such matters, of course, materially increase the risk that (a) practical completion is achieved under the building contract, while (b) ‘completion’ is not deemed to have been achieved under the related contract.

This, in turn, can have very serious commercial consequences. A developer could find itself in a situation where: (i) its contractor has achieved practical completion – and so has handed back the site, is now just dealing with snagging and is no longer liable to pay liquidated damages for delay; but (ii) the tenant or purchaser is not yet obliged to complete the lease or sale of the property – leaving the developer stuck in the middle, having to deal with ongoing financing obligations, insurance of the works, site security and so on.

Accordingly, if a developer does need to deliver drawings, provide collateral warranties or operational and maintenance manuals to a tenant or a purchaser in order to trigger completion of a lease or a sale, it is important to consider whether or not the provision of such documents should be a condition of the contractor achieving practical completion under the building contract.

Triggering obligations

The courts have had to consider the ‘trigger’ obligations in a number of related contracts, which tied them back to practical completion under a building contract.

Ultimately, what these cases show are some of the diffculties that can arise for future occupants at the point of practical completion.

In Kingerlee Holdings Ltd v Dunelm (Soft Furnishings) Ltd [2013] EWHC 47 (Ch):

• an agreement for lease obliged the landlord to give a ‘notice to inspect’ to the tenant, and then a ‘notice of intention to issue the practical completion certificate’;
• the landlord did not give either of these notices; and
• the tenant argued that these notices were conditions precedent, and so practical completion could not happen (under the agreement for lease at least) unless and until the landlord had given the tenant the required notices.

The court dismissed the tenant’s arguments and held that the landlord’s notices were not conditions precedent to practical completion and the practical completion certificate issued under the building contract was effective for the purposes of the agreement for lease.

Similar issues arose in the context of a share purchase agreement (SPA) in Menolly Investments 3 SARL v Cerep SARL [2009] EWHC 516 (Ch):

• completion of the SPA was dependent on practical completion of works under a building contract, although other conditions also had to be met;
• as with Kingerlee v Dunelm, the SPA obliged the seller to give a notice to the buyer of its intention to inspect the works for the purpose of establishing whether practical completion had occurred; and
• the seller failed to fulfil some of the conditions, and also failed to give the buyer the requisite notice.

The court decided that the practical completion certificate was invalid, because of the failure to fulfil some of the conditions (although the court also decided that the buyer had waived its right to deny the validity of the certificate). However, the court again decided that the seller’s obligation to give a notice was not a condition precedent to issuing a valid practical completion certificate.

The clear message from these cases is that only careful, considered and clear drafting might prevent such arguments, in the event that – for whatever reason – one party wishes to delay or avoid completing a related transaction at practical completion.

Mears v Costplan

The case involved the construction of two blocks of student accommodation in Plymouth. Under an agreement for lease, the tenant was obliged to take a 21 year lease of the building within five working days of practical completion. The development began in late 2016, by mid-2018 the tenant had raised a number of issues with the landlord regarding quality, including a claim that many of the student rooms had been built to smaller dimensions than were permitted under the agreement for lease.

In particular, the landlord was prohibited from:

• making ‘material and substantial’ variations to the works; and
• variations to the works that ‘materially affected’ the size, layout or appearance of the property being constructed, and a reduction in room size of more than 3% was expressly deemed to be a material variation.

The tenant was entitled to – and did – make representations in relation to the state of the works. These were seemingly ignored, and so the tenant applied to the court for an injunction to prevent practical completion from being certified.

The tenant argued that the landlord’s failure to build the rooms within the tolerance set out in the agreement for lease was a ‘material and substantial breach’ – and because it could not be remedied, practical completion could not be certified.

If practical completion was not certified by a longstop date in the agreement for lease, the tenant was then entitled to terminate the agreement and walk away.

The High Court agreed with the tenant that the room dimensions constituted a breach of the agreement for lease (being a material variation prohibited under the relevant clause) – but decided that this breach was not itself a ‘material and substantial’ breach that entitled the tenant to terminate the agreement for lease, and it was therefore appropriate for practical completion to be certified.

The Court of Appeal upheld the High Court’s decision. In particular, the Court of Appeal decided that:

• whilst the landlord was prohibited to reduce the room size by more than 3%, the parties had not agreed what the consequences of such a breach would be;
• the tenant’s interpretation – namely that any such failure by the landlord would amount to a material breach entitling the tenant to terminate the agreement for lease – was commercially absurd;
• certification of practical completion under the related building contract was purely a matter for the certifier – the agreement for lease did not offer the tenant any control over that process; and
• for the purposes of determining whether or not the works were practically complete, it was irrelevant whether or not a defect could be remedied. What mattered was the seriousness of the defect, when measured against the tenant’s intended use of the completed works. In the words of the Coulson LJ, it mattered whether the defect was, when measured against such use, ‘more than merely trifling’. If it was, then practical completion could not be certified until the defect was rectified.

Practical implications

Ultimately, what Mears v Costplan tells us is that:

• there are no hard and fast rules regarding practical completion – it ultimately remains easier to recognise than to define;
• when it comes to patent defects (that is, defects that are apparent at the time of practical completion), there is no difference between work that has yet to be completed and defective work which needs to be remedied;
• where ‘practical completion’ is not defined, the courts may adopt a more flexible approach to the meaning of practical completion than has previously been the case. This is at odds with a number of recent cases in the High Court, such as Hall v Van der Heiden (No 2) [2010] EWHC 586 (TCC), where the court defined practical completion ‘the completion of all the construction work that has to be done’ and said that practical completion would not be certified where there were patent defects in the works that were ‘more than de minimis’; and
• practical completion may be achieved and certified where a defect exists that cannot be remedied – the key question is whether or not such a defect is ‘merely trifling’ in the context of the works and their intended use.

The practical message, therefore, is that if it is important to a party for a certain requirement to be met before practical completion is achieved (for example, elements of work that must be finished in their entirety, without faults or minor defects) this should be set out clearly in the relevant agreement.

This article was first published in Construction Law in September 2019.