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Practical Completion in Construction Contracts and their affect on Agreements for Lease

Practical Completion in Construction Contracts and their affect on Agreements for Lease

Practical completion is generally the point at which an 'expert' will confirm that a building project is complete, except for minor defects that can be put right without undue interference to an occupier. An Agreement for Lease will rely on this date and problems often arise when deadlines are not met or the level of acceptable 'minor defects' is disputed.

Our Commercial Property Team frequently act for clients in property transactions where the building which is the subject of the proposed transaction is not yet built, or is undergoing substantial refurbishment. In cases such as this, it is common for the parties to enter into a contract with no actual completion date but a mechanism by which completion will be triggered, which is normally "practical completion" of the works required to the building.

Agreements for lease will normally have a long stop date and if completion does not occur before the long stop date and practical completion has not occurred then, unless the parties agree an extension, the parties are free to walk away from the contract.

In our experience, the most common dispute arising in these matters is where the builder says that the works are "practically complete" and the buyer does not agree.
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What amounts to Practical Completion?

There is a no exact science as to what amounts to practical completion. However, the 2019 case of Mears Limited v Costplan Services (South East) Limited in the Court of Appeal has provided some guidance. Read our summary of the case and its repercussions .

In this case, the Court of Appeal set down guidance for the future and it is worth setting that guidance out here in full.

  1. Practical completion is difficult to define and there are no hard and fast rules.

  2. A latent defect will not prevent practical completion.

  3. It makes no difference whether a defect involves an item of work not yet completed or one that has been completed but is defective.

  4. Patent defects will be sufficient to prevent practical completion except if they are trifling.

  5. The ability to use the premises as intended may be a factor in considering whether a patent defect is trifling in nature.The court pointed out that even if the building can be used for its proposed purposes, it does not necessarily mean that the works are practically complete.

  6. The fact that a defect cannot be remedied does not mean the works are not practically complete.
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Trifling Defects

This new guidance is important for builders and developers alike but also creates more grey area in some ways. Trifling defects will not prevent practical completion. However, how one defines a trifling defect will now become the major question to determine.

Where completion of a legal agreement is triggered by practical completion, the parties will need to be substantially guided by their expert surveyors. Frequently, an agreement for lease will be in fairly standard terms and will state that the signing of a certificate of practical completion by the developers' surveyor is sufficient. 

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Surveyor Guidance

If defects are alleged and the buyer does not wish to complete, the buyer will need good expert evidence that there are defects at the time the certificate of practical completion was issued, which are more than trifling, and which in fact prevent the building being practically complete.

It is also vital to consider the precise wording of the Agreement. Any specific requirements as to the form or service of the Practical Completion Certificate must be strictly adhered to.

Legal Advice

If you require expert legal advice on such a matter, our specialist Commercial Property Litigation Team would be happy to advise on development agreement disputes including agreements for lease disputes.

Our Commercial Property Team can also assist in the drafting of such documents to ensure that your Agreement for Lease is fully comprehensive in the first instance and avoid litigation down the line.

 
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