Current market conditions mean there may be valid commercial reasons why a developer may not want to build out a development. Equally, there may be valid commercial reasons why a purchaser may not want to continue with its purchase of a completed development. This issue was the focus of a recent case, Menolly Investments 3 SARL v (1) Cerep SARL (2) Menolly Homes.
In this case, completion of a share purchase agreement (SPA) was dependent on, among other things, practical completion of works under the building contract. However, practical completion under the building contract did not automatically constitute completion of the works for the purposes of the SPA: the SPA contained a mechanism whereby “achievement” or otherwise of practical completion could be challenged under that agreement. This is relatively common. Funders, tenants and purchasers typically require that the conditions precedent to completion of building/refurbishment works under a sale/purchase agreement or agreement for lease include provision of further information and/or sign-off by their own surveyor. Alternatively, they may insist on a right to refer the question of whether practical completion has occurred to independent expert determination.
Inherent in these more complex structures is the risk that practical completion is achieved under the building contract while “completion” is not deemed to have been achieved under the associated contract: a purchaser could avoid completing the purchase or a tenant could avoid taking up its tenancy if completion has not occurred by any long stop date in the purchase agreement or agreement for lease.
This is precisely what happened in Menolly. The purchaser challenged the validity of the certificate of practical completion in relation to one section of the works. On the facts, the court found that, in issuing the certificate of practical completion, the employer’s agent had gone outside his authority and the court agreed that the certificate was invalid for the purposes of the SPA.
In the current market, this case takes on more significance and raises some important practical issues for all parties involved in these transactions:
- Understand the effect of the practical completion certificate under the building contract. Does it automatically constitute “completion” for the purposes of your sale/purchase agreement or agreement for lease? If not, what rights of objection do you have as a purchaser or tenant? Are there any rights to make representations to the employer’s agent under the building contract and what effect do these have?
- Monitoring progress of the works. As a developer, make sure you give notice to any purchaser/tenant of all inspections of the works, if your contract requires you to do so, in particular any inspection of the works to certify practical completion. Purchasers and tenants, make sure that you attend site inspections and pro-actively monitor progress of the works so that you can raise any concerns promptly.
- Be prompt. If, as a purchaser or tenant, you have concerns as to whether or not completion has been achieved, raise these in writing so that the developer has notice of your concerns. It is unlikely in practice that practical completion will be certified regardless of your objections. Also, do so promptly to reduce the likelihood of being prevented from raising your objections later (as happened to the purchaser in Menolly). Developers should be aware that if a purchaser or tenant does not raise its objections to the issue of a certificate of practical completion promptly, they may have waived their right to deny the validity of this certificate.