Stephanie Canham explains why staged completion must be handled with care
Staged completion is often a commercial necessity of development, but how it is dealt with – whether it is thought through before the contract is signed and documented in the building contract or becomes a commercial requirement post award of the building contract – needs to be handled with care.
Staged completion can be dealt with by utilising the well-established sectional completion route where you in effect create mini building contracts within the framework of the building contract you are letting – each part of the overall scope of the works (the “sections”) having its own defined scope, contract sum, commencement date, completion date, liquidated and ascertained damages, if applicable for that section; the terms and conditions of the building contract applying (unless the project specifics require otherwise) to each section.
Sectional completion is very useful and very straightforward to use provided that it is thought through in terms of the divvying up of the overall works. That needs to ensure that whatever comprises the scope of works for a particular section can stand alone in terms of what will be complete at the point of practical completion of the section; that works to enable the unfettered use and occupation of whatever comprises the scope of works comprising that section both in terms of disposal/use of the buildings/facilities in question; if relevant, the mortgageability of that; sign-off by the latent defects insurers as well as how, in practical terms, that would work with possible ongoing works as part of the overall development.
Simple really, but the recent case of the University of Warwick vs Balfour Beatty Group Ltd reinforced the need for great care to be taken when dealing with sectional completion. While the contract concerned provided for sectional completion, the definition of what constituted practical completion that had been drafted into the contract, all 450 words of it, led to a dispute. The contractor argued that notwithstanding the references to sectional completion in the contract, practical completion could only occur when the entire works were complete which, in turn, would render the liquidated and ascertained damages provisions for each section inoperable.
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The lengthy definition of practical completion provided practical completion as “a stage of completeness of the works or a section which allows the property to be occupied or used …”. The issue was that the “property” was defined as “the property comprised of the completed works” – clearly not thought through carefully enough.
The dispute was referred to adjudication and the adjudicator agreed with the contractor’s interpretation. The employer began court proceedings and the Technology and Construction Court held that the practical completion definition, if looked at in isolation, allowed for sectional completion, other provisions of the building contract supporting the view that the parties’ clear intention back up by the factual background and business common sense was that the works were subject to sectional completion.
Another way of taking early possession of parts of the works is to use the mechanism of partial possession. If partial possession is contemplated and once again thought through very carefully when considering when to take early possession, then taking early possession of part of the works could work well for both employer and contractor. The effect of partial possession is that those parts of the works are practically complete and the usual risk transfer of insurance risk, trigger of the defects liability period and release of half the retention is triggered.
What still surprises me is how many developers so often fail to provide for sectional completion in their contracts or, even if they do, they still make the commercial decision to take possession of parts of, say, a tower block or a block on a floor-by-floor basis in the belief, having sold them on or closed off access to the contractor to those floors, that they have not taken possession and thus have not triggered practical completion of those works. Their understanding is that once the whole block/tower is completed, only then, as the tower/block was the subject of the defined section of works or the works comprising the building contract, will practical completion be certified and the works be practically complete.
Consider the options carefully and proceed with caution.