The customer is always right?

Developers do not develop for themselves. It is agreements with future tenants and purchasers that help make the property world go round. The terms of these agreements can be hotly debated.

For a tenant or purchaser, much of the focus in negotiating a development agreement (such as an agreement for lease) will be on requiring the developer to deliver the property to an appropriate standard. After all, a tenant or purchaser will often be relying on the developer’s skill and experience, even if they also receive collateral warranties or third party rights from the contractor and consultants.

So the agreement will typically give the third party a right to inspect the works prior to completion, and to make representations in relation to defects that appear afterwards.

Developers will similarly seek to protect their own position. For example, a developer will often require a release from liability for the quality of the completed works triggered by the issue of a certificate of making good defects under the building contract. Many developers are unwilling to carry development liabilities for longer, let alone up to expiry of the statutory (six or 12 year) limitation period.

The recent case of Apcoa Parking (UK) Limited vs Crosslands Properties Limited, decided in the Outer House of the Scottish Court of Session, nicely illustrates all of this.

The case concerned liability for defects in a multistorey car park in Dunfermline. Under an agreement for lease, Crosslands agreed to build and lease the car park to Apcoa.

A developer will only be able to rely on a release clause if it complies with associated obligations

Crosslands was required to carry out the works in an appropriate manner. The agreement also gave Apcoa rights to make representations on the standard of the works, both during construction and ahead of issue of the certificate of making good under the building contract.

However, the certificate was issued without Apcoa having been given that opportunity. Apcoa was not aware of the certificate and made a claim against Crosslands for defects. Crosslands sought to rely on the developer’s release in the agreement. That clause provided for Crosslands to be released from liability for defects on issue of the certificate.

The judge held that the release was ineffective. The clause did not refer to any preconditions to release other than issue of the certificate of making good and delivery of collateral warranties (both fulfilled). But he decided that the parties could not have intended for Crosslands to benefit from the release, when it had failed to follow the defects provisions in the agreement. The opposite conclusion would allow Crosslands to bypass provisions specifically designed to get Apcoa comfortable with the principle of a release.

So a developer will only be able to rely on a release clause if it complies with associated obligations. If it doesn’t, it will continue to be liable for its defects, at least until it has finally discharged its duties. Obvious enough.

But there are some other things to bear in mind. For example, in England and Wales a landlord’s development obligations in an agreement for lease “run with the land” under the Landlord and Tenant (Covenants) Act 1995, unless the agreement makes them personal to the developer.

Ordinarily, such obligations will be made personal, but that is not always the case. The upshot could be that a purchaser of the development becomes liable (in addition to the developer) to a tenant for undischarged construction-related liabilities under the agreement for lease. This may well not be what is intended.

At the least, a developer – and any purchaser from it – should think carefully about where, ultimately, such liabilities should sit. It may be necessary to put in place arrangements between the developer and purchaser on a sale, governing how any undischarged obligations to a tenant are to be met.

Equally, tenants will wish to ensure that development obligations are not lost on the grant of a lease. That can occur through the doctrine of merger, under which undischarged development obligations are superseded by provisions in the lease allocating liability for repairs.

In many leases, full repairing liability is placed on the tenant. But the deal may well be that the developer is, nevertheless, to retain some ongoing liability, particularly in relation to enforcing defects liability provisions in the building contract. Again, this is a point to pick up in negotiations and by specific drafting in the agreement for lease.

Iain Suttie is an associate director, non-contentious construction at BLP