Site investigations: Don't get stuck on shaky ground

When buying a site for development, any prudent developer will commission a geotechnical and environmental report on the ground conditions. They will use this report to assess whether the site needs any remediation works (and if so, the likely cost), as well as calculating the necessary depth of the foundations for the proposed development. This will be fed into the appraisal and be a key factor in the decision to buy the site and securing funding.

As often as not, the seller of the site may have already commissioned such a report, and will offer to pass the benefit of that report on to the developer, usually by the author of the report either issuing a letter of reliance or by re-addressing the report to the developer.

Here a report is re-addressed to the developer, a new contract is formed

But do either of these options give adequate protection to the developer?

It should always be remembered that the report is not a contract, but simply the output of the contract entered into between the author of the report and the seller who commissioned it. Therefore, a letter of reliance confirming that the developer may rely on the report as if it were the seller may not actually give the developer any real protection. The author will still be able to rely on their original contractual rights, which may include limitations on liability which will significantly undermine the value of such a letter. For example:

• the author may have no liability for consequential loss
• the author’s liability may be capped to a fixed sum
• the original contract may have been formed by an exchange of correspondence, meaning the author’s liability expires six years from the date of the report.

A properly drafted letter of reliance should contain the following:

• a statement setting out which report(s) the developer can rely on
• a licence for the developer to use or copy the report
• a warranty that the author applied an appropriate level of skill and care when preparing the report
• an obligation to maintain appropriate professional indemnity insurance
• the right to assign the letter to, or to have further letters in the same form issued to funders, purchasers or tenants
• clarity on when the author’s liability will expire under the letter.

As there is no existing contractual relationship between the two, for the developer to make a claim against the author, the letter must be signed as a deed or the developer must make a nominal payment to the author.

The author may also want to include a provision in the letter which states they have no greater liability to the developer than they had to their original client. A developer should only accept this where it has reviewed the original contract and is therefore aware of any limitations agreed between the seller and the author.
Similar issues arise where the author re-addresses the report to the developer. Consideration must be given by the developer to the author, otherwise there is potentially no contract between the two and the developer will not be able to make a claim against the author. The author will also undoubtedly want the original terms of the contract with the seller, including limitations on liability, to apply and may include a statement to that effect in the report. The developer must see the contract before agreeing this.

Remember, where the developer pays to have the report re-addressed to them, a new contract is created. There is therefore an opportunity for the developer to re-negotiate any unfavourable terms, although the author will have the upper hand.

Site investigation is a fundamental step in any development. Any party commissioning a geotechnical and environmental report should appoint a consultant in writing, setting out the scope of the services, requiring the consultant to exercise appropriate skill and care, to maintain adequate professional indemnity insurance and to sign collateral warranties (in an agreed form) in favour of funders, purchasers and tenants. Ideally, the appointment should also be executed as a deed. These steps will ensure that the developer (and the beneficiaries of any warranty) can rely on the report for 12 years from completion.

If you are a purchaser relying on an existing report, make sure you can claim against the author and that you are aware of any limitations on their liability, otherwise you might find yourself on unsteady ground.

Tom Peel is a construction and engineering partner at Walker Morris