REUTERS | Jitendra Prakash

Ask the Team: What happens when a warrantor converts from a partnership to an LLP?

The question

What do you do if a professional consultant (such as an architect) changes its status, for example, if it converts from a partnership to a limited liability partnership (LLP), after its formal appointment, but before it is asked to provide collateral warranties? Who do you ask to provide the warranty, the old entity or the new entity? If the new entity, what safeguards do you insist upon?

The questioner’s thoughts

The subscriber who asked us this question indicated:

I do not think there is an easy answer and I would be really interested to see what people say. My own practice is often to obtain some sort of evidence that the new entity has taken over the liabilities of the old entity, usually by a certified copy of an extract of a deed entered into by the partners when they establish the LLP, and I then accept a collateral warranty from the new entity, amending the collateral warranty’s recitals to explain the change.

PLC Construction’s thoughts:

On commercial projects, building contractors and sub-contractors tend to be limited companies or public limited companies (PLCs). In contrast, professional consultants historically operated as (traditional and unincorporated) partnerships. In recent years, many professional consultants have converted from partnerships to LLPs.

The reason for this change is that partners in a traditional partnership may be personally liable for the actions of their business. In contrast, an LLP is a legal “person”, able to enter into contracts in its own rights, and this can help partners (known as the members of an LLP) to limit their personal liability.

This trend has given rise to a problem for beneficiaries of collateral warranties relating to construction. What happens if the beneficiary is offered a collateral warranty from a professional consultant that has converted to an LLP since being appointed? The partnership is no longer around to provide a collateral warranty, but the LLP was not party to the professional appointment.

Beneficiary usually seeks proof that the LLP has assumed liability

If the beneficiary is to rely on a collateral warranty from the LLP, it needs some comfort about the LLP’s liability under that collateral warranty. It is difficult to say what amounts to sufficient evidence that the partnership’s liabilities have been “transferred” to the LLP and it may not be clear what process has “transferred” liability. For example, the partnership and the LLP would not (on the face of it) be able to novate the professional appointment from the partnership to the LLP, without their client’s consent.

Common practice is to accept a collateral warranty from the LLP but to insist on seeing a certified copy of a binding agreement, under which the LLP assumes the liabilities of the partnership, perhaps expressed as an agreement by the LLP to accept those liabilities and an indemnity from the LLP in favour of the partners in the (former) partnership.

However, in some cases, copies of formal documents are not forthcoming (or cannot be obtained within the time constraints of the deal). In that situation the beneficiary has a difficult choice. It may:

  • Choose to withdraw from the deal (be it tenancy, purchase or funding). In practice, it is rare for the absence of one adequate collateral warranty from a professional consultant to end a deal, unless it is combined with other factors.
  • Insist on other protection (a tenant might want a reduction in its repairing obligation, a purchaser might renegotiate the purchase price or withhold a retention from it). Again, this is a commercial decision depending on several factors.
  • Accept a lesser form of comfort, such as a letter from the LLP confirming that it has taken on the liabilities of the partnership, together with a collateral warranty from the LLP.

The parties sometimes agree amendments to the collateral warranty

In some cases, the beneficiary may seek amendments in the collateral warranty that formally confirm the LLP’s adoption of liability. This is less common because warrantors tend to resist amending warranties from the agreed form (except so far as necessary to change the warrantor’s name and insert the correct execution provisions for an LLP). Often, the most that the parties can agree is an additional recital stating the position.

Factors that may affect a beneficiaries commercial position

The beneficiary’s commercial position may be affected by one or more of the following factors:

  • Building survey: The older the project, the more weight a beneficiary is likely to place on its own building survey. (Even if a collateral warranty might allow a claim for up to 12 years after practical completion, many beneficiaries do not give them much weight after ten years or so.) If the survey and the age of the building gives the beneficiary comfort about the integrity of the building, then it may be willing to take a commercial view on the adequacy of an individual warranty, especially if the collateral warranties are otherwise in an acceptable form.
  • Warrantor’s position in the contract structure. The warrantor’s position in the contract structure may mean that it is not the first port of call for the beneficiary in the event of a defect. For example, in a design and build project, the beneficiary is likely to pursue the building contractor for recompense. While (even if a professional consultant’s collateral warranty is causing a problem) the expectation of a claim against the contractor may provide some comfort, that expectation will not help the beneficiary if the building contractor cannot be pursued (for example, if it is insolvent).
  • Joint and several liability of other parties. Many design or workmanship issues are the fault of more than one party, meaning that, in many situations, the beneficiary will able to make substantive recovery from other parties, under the doctrine of joint and several liability. However, there is still a risk that a fault is entirely the responsibility of the warrantor and (unfortunately, from a beneficiary’s perspective) a net contribution clause is a common feature of the modern collateral warranty.

Checking company names and status is good practice

As a point of practice, it is always worth checking that the identity of a warrantor matches the name on the underlying contract or appointment and worth checking the company’s insolvency status. In the case of a company or LLP registered at Companies House, a quick search is free and the check should include checking that company numbers match. This avoids any confusion from changes of company name, which is especially common during a recession, when a company may be dissolved and then a new “phoenix” company formed in the aftermath. A Companies House check is a quick and valuable part of any construction due diligence exercise.

Our thanks to Jane Hughes of Collyer Bristow for her thoughts on this topic.

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