Collateral Warranties

With new office and residential building work taking place around the Island, the ways in which owners and lessees can protect themselves against potential defects caused by the contractors and their professional team is particularly topical. This briefing explains how a site owner or lessee of a new building can introduce duty of care deeds, otherwise known as collateral warranties.

The owner of a site has entered into an agreement with a contractor to develop that site - as offices, for example – with the usual facilities including car parking.

If the owner is prudent he will have already made an arrangement with someone to lease the premises once they are complete. The lease, as is usual these days, would be fully repairing/insuring.

But if any part of the building is defective, how can the lessee - who is agreeing to take a new, untested building on a fully repairing lease - have a claim against either the contractor and/or any of the professional team involved in the construction?

And where a contractor has been asked to draw up a design to the owner's specifications - rather than following plans drawn up by the owner's own architect - how can the owner have a claim against the professional team used by the contractor?

The answer is collateral warranties.

We would advise a lessee to request, as a minimum, collateral warranties from the contractor and professional team involved in the construction of the building. Depending on the nature of the Joint Contracts Tribunal (JCT) building contract being entered into, the owner would also be advised to require collateral warranties from the professional team.

There are two main types of building agreement, the JCT Building Contract (Private with Quantities) and the JCT Building Contract (with Contractor's Design).

In the first the contractor covenants to follow the plans prepared by the owner's architects, mechanical and electrical engineers etc. The contractor will enter into the JCT directly with the owner. The owner will also appoint the architect, mechanical and electrical engineers etc. The owner will, therefore, be able to action any or all of these people for breach of contract(s) on the basis that he has a direct contract with them.

The lessee however, has no form of contract with any of these persons and therefore could find himself in a situation where the building is defective and he has no right of recourse against any of the people involved in its construction.

In the other form of contract (contractor's design), the contractor is effectively given a brief and organises a design to the owner's requirements using his own professional team.

The only direct contract is the JCT between the owner and the contractor. Neither the owner nor the lessee has any form of contract with any member of the professional team and the lessee has no contract with the contractor.

Collateral warranties, therefore, provide for the lessee to be able to claim against either the contractor and/or any of the professional team or, in the case of the JCT with contractor's design, for the owner to have a claim against the professional team used by the contractor.

It should be a requirement at the time of the execution of the JCT (no matter which type) that the professional team involved agree to enter into collateral warranties with the owner (if need be) and the proposed lessee of the new building. This then allows the owner/lessee to bring an action against the contractor and any member of the professional team for any defects that may occur in the premises caused through the fault or negligence of that particular person. Collateral warranties are sometimes known as duty of care deeds.

For obvious reasons, members of the professional team endeavour to restrict their liability under a collateral warranty. It is common for members of the professional team to try to limit any liability for consequential and economic loss and, preferably, to exclude it from the warranty. A lessee may not be able to use premises because of defects arising through the negligence or breach of contract of one of the professional team. If the lessee has agreed to limit liability for consequential and economic loss then that professional is only liable for the costs involved in remedying the physical problems. Loss of income of the lessee is not covered under this type of collateral warranty.

It has to be said that there has been reluctance by professionals to enter into collateral warranties, although it is becoming more of a standard practice in major developments. It is rare, however, for a professional to agree to cover consequential and economic loss of either owner or lessee.

There will be a requirement in the collateral warranty that the professional maintain indemnity insurance. It is important that confirmation be obtained of the insurance cover at the time of the professional entering into the warranty and also that the professional confirm with his insurer that he may enter into the collateral warranty and the terms of such a warranty be agreed with the insurer. The owner/lessee should check from time to time that the relevant indemnity insurance is still in place.

Collateral warranties usually run for a period of twelve years mainly because the format used in Jersey follows the collateral warranties issued under English Law. Under English law a collateral warranty is given by way of a deed and therefore has a term of twelve years.

The collateral warranty will usually specify that there can only be a specified number of assignments of the warranty to another party. It is important that the owner/lessee be able to assign the benefit of the warranty to any purchaser of the property within ten years of completion. An assignee of the lease in that period would be advised to have the benefit of the warranty assigned to him so that he in turn could have recourse against the original contractor/professional team, should the need arise.

From the lessee's point of view it would be preferable to have the lease written so that the lessee would not be responsible for any defects arising through negligence or breach of contract of the contractor and/or professional team. A prudent owner may not allow this. The lessee must therefore be able to have recourse against both contractor and professional team.

It should be borne in mind that the lessee might not be able to recoup all losses or costs depending on the nature of the collateral warranty. The lessee would certainly be unlikely to recoup consequential or economic loss.

Equally, in this situation it is probable that any claim against the contractor and/or the professional team would result if not in a court action, then at the very least in lengthy negotiations. All of which could result in extra costs to the lessee. Under the terms of the lease the lessee may be required to make good the defects and therefore may have to pay to remedy them prior to being able to recoup any losses from the contractor and/or professional team.

Collateral warranties are in addition to the defects period set out in the JCT. The majority of contractors in the Island will now agree to a twelve-month defects period from the issue of the certificate of practical completion. Obviously, it is important from both owner's and/or lessee's stance that the defects are fully noted and dealt with in accordance with the terms of the relevant JCT.

Points to remember:

• Depending on the nature of the Joint Contracts Tribunal (JCT) building contract being entered into, site owners should require collateral warranties from the professional team.
• Lessees should request, as a minimum, collateral warranties from the contractor and professional team involved in the construction of the building.
• There will be a requirement in the collateral warranty that the professional maintain indemnity insurance. The owner/lessee should check from time to time that the relevant indemnity insurance is still in place.
• It is important that the owner/lessee be able to assign the benefit of the warranty to any purchaser of the property within ten years of completion.
• The lessee must therefore be able to have recourse against both contractor and professional team for any defects arising through negligence or breach of contract of the contractor and/or professional team.