For the first time in 50 years, the Court of Appeal was recently asked to consider the meaning of practical completion in the context of a building contract. The case centred on two student accommodation blocks in Plymouth.
Mears, as provider of managed student accommodation, entered an agreement for lease (AFL) with developer Plymouth (Notte Street) Limited (PNSL), which engaged JR Pickstock to design and build the two blocks. Costplan was the employer’s agent, named in both building contract and AFL.
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As prospective tenant but not a party to the building contract, the AFL prohibited PNSL from making any variations to the building works which materially affected the size – defined as a reduction of 3% – layout or appearance of the room.
PNSL was required to carry out the landlord’s works which included the employer’s requirements (annexed to the AFL and also a key component of the building contract). The AFL contained provisions setting out practical completion requirements for the landlord’s works and that, five days after practical completion certification, Mears would execute a lease in terms set out in the AFL.
What is practical completion? Lord Justice Coulson’s explanation
- It is easier to recognise than define.
- Latent defects can’t prevent practical completion from being achieved since nobody knows about them.
- For patent defects, there is no difference between work items yet to be completed and defective work requiring remedy. Snagging lists can and will usually identify both types.
- Practical completion can only be achieved where works have been completed, free from patent defects, other than those considered “trifling”.
- Whether an item is “trifling” depends on whether the works could be used as intended. In the Mears case, the fact that the rooms were 3% smaller than required did not prevent them being used for their intended purpose: student accommodation.
- A defect being irremediable does not preclude practical completion.
Further, the AFL provided that the issue or non-issue of the practical completion certificate was in the “sole professional discretion” of Costplan.
The AFL defined the certificate as “issued by the employer’s agent to the effect that practical completion of the landlord’s works has been achieved in accordance with the building contract”.
The practical completion issue arose because Mears issued defects notices under the AFL alleging that many of the rooms had been constructed more than 3% smaller than required. Despite this, Costplan indicated it intended to issue the certificate of practical completion.
In August 2018, Mears was granted an interlocutory injunction restraining Costplan from issuing the certificate and an expedited trial was ordered. Mears agreed not to terminate the AFL until after the Technology & Construction Court (TCC) judgement.
Mears sought a declaration at trial that any variation to the works which breached the room size clause would also be a breach of the AFL and prevent practical completion. Judge Waksman disagreed, stating this interpretation meant that one material deviation in one room would entitle Mears to terminate. He deemed this “commercially absurd”.
The case went to the Court of Appeal, where Lord Justice Coulson agreed Mears’s interpretation of the AFL was wrong; though 56 completed rooms had sizes below the 3% tolerance specified, it was not a material breach of contract.
He reasoned: “If the parties agreed that any failure to meet the 3% tolerance, no matter how trivial, amounted to a material breach of contract, it would lead to a very uncommercial result. It would mean that every room would be the subject of minute measurement, and one trivial failure… allowed Mears to determine the AFL. In my view, clear words would be necessary for such a draconian result and there are no such words in the clause.”
The judgement by Coulson, who also provided a succinct review of practical completion (see box), highlights the problems with contractual drafting and differing interpretations. The parties to a construction contract can agree that a particular clause amounts to a material and substantial breach of contract – but the drafting needs to be clear.
Justine Brazil is a partner at Spencer West
