Can irremediable defects prevent practical completion?

The case of Mears Ltd v Costplan Services Ltd [2018] EWHC 3363 is a helpful reminder of potential issues for a contractor on practical completion when a completed scheme is the subject of an agreement for lease (AFL).

Mears was to take a 21-year lease of two blocks of student accommodation in Plymouth from developer PNS after completion. Costplan was the employer’s agent and the building contract was JCT 2011. Whether practical completion had been reached was disputed, as Mears complained 50 rooms were smaller than the AFL specified.

Completion was to take place within five working days of practical completion being certified under the JCT contract. The timing was all-important as, if practical completion was not achieved by a long-stop date of September 2018, Mears could walk away – a standard obligation under an AFL. 

“The overlap between practical completion on the one hand, and patent defects and breaches of contract, on the other, has never been the subject of modern or comprehensive guidance”

Lord Justice Coulson

The AFL contained provisions giving Mears some say in, though not a veto on, when practical completion could be certified – all standard stuff. So the determination of whether it had been achieved was still regulated by the JCT contract. Costplan took the view there was no impediment to practical completion, but Mears obtained an injunction to prevent Costplan so certifying.

Mears also sought declaratory relief that the lesser room sizes were a material and substantial breach of the AFL and that the employer’s agent could not certify practical completion under the building contract where there were such material and substantial breaches. Clause 6.2 of the AFL provided that any a variation to the works materially affecting size, layout or appearance (including a reduction in size of distinct areas by more than 3%) would be a breach of the AFL. 

Mr Justice Waksman’s findings of fact were that:

• It had been made out that one or more rooms were more than 3% smaller than in the AFL.
• It had not been proved that this amounted to a material and substantial breach of the AFL in accordance with clause 6.2. 

The judge found the AFL did not impose a higher standard for practical completion than that contained in the building contract or that which would typically apply. He adopted Keating on Construction Contracts’ statement of principle on what constitutes practical completion:

• The works can be practically complete notwithstanding there are latent defects.
• A certificate of practical completion may not be issued if there are patent defects. A patent defect is one that is evident or obvious on completion.
• Practical completion means completion of all the construction work that has to be done
• However, the architect is given some discretion […] to certify practical completion where there are very minor items of work left incomplete on the de minimis principle. 

The judge stated that works need not in every respect be in complete conformity with the contract to merit practical completion, provided that any non-conformity is insignificant – a matter usually left to the certifier. 

The complaint here was an irremediable breach but that did not mean such can never prevent practical completion. Although Ruxley vs Forsyth (the shallower swimming pool case) was used to support the argument that practical completion can be certified where there is an irremediable defect, the judge distinguished this on the basis that each depends on its own facts. 

Practical completion, he found, will be certified if, to all intents and purposes, the building is complete – and that intent and purpose of the building is key. For example, he stated that if the building is to house people, the emphasis is on it being fit for occupation. This is highly fact sensitive. Having refused to grant Mears a declaration that the 3% shortfall was a material and substantial breach of the AFL, he refused to grant the declaration as to whether this defect did prevent practical completion being certified.

He did so because it depended acutely on the facts and contractual context and that he was being asked to give a definition of practical completion in very general and abstract terms. It was also not necessary for him to decide these points, having decided that Mears had failed to prove the material and substantial breach. 

This case highlights two very common issues:

• How the tenant or forward purchaser of a developer links its requirements to those under the building contract – which is up to those drafting the two agreements. Differing definitions of practical completion between the two agreements can cause problems. Here they were found to be consistent.
• How to assess the materiality of specification shortfalls on certifying practical completion which do not prevent occupation or use but do not deliver exactly what was stipulated. On these types of shortfalls the current generally accepted definition of practical completion is silent.

Permission to appeal this judgment was given by Lord Justice Coulson stating: “The overlap between practical completion on the one hand, and patent defects and breaches of contract, on the other, has never been the subject of modern or comprehensive guidance.”

The appeal is to be heard in March – which may be when we obtain a comprehensive definition of practical completion in relation to the type of issues described here. 

Lindy Patterson QC is a barrister, arbitrator and adjudicator at 39 Essex Chambers