The term ‘practical completion’ does not have a standard definition but generally means that the building project is complete, save for minor defects that can be remedied without causing interference to an occupier. If defects are material, rather than minor, it can give a right to termination of the contract.
This principle was tested in the Court of Appeal in the case of Mears Limited v Costplan Services.The Court determined that, on the facts of this case, a flexible and a commercially workable solution was required.
Facts of the case
J.R. Pickstock Limited is a developer and a building contractor. On 27 May 2016 it was engaged by the landlord, Plymouth (Notte Street) Limited (PNSL) to design and build two blocks of student accommodation in Plymouth. On 20 May 2016, Mears Limited, a company in the business of providing managed student accommodation, entered into an agreement for lease with PNSL to take a long lease of the property following completion (the final step in the legal process of transferring the ownership of the property).
The agreement for lease prohibited PNSL from making any variations to the building works, which materially affected the size of the rooms. A reduction of more than 3% of the size of the room was considered to be material and, therefore, prohibited.
A dispute arose when Mears discovered that 56 rooms had been constructed materially smaller than provided on the planning documents. Mears sued on the basis that any failure to construct one or more of the rooms more than 3% smaller was a material and substantial breach of the agreement for lease. Mears stated that this meant that:
- They were entitled to determine the Agreement for Lease;
- Costplan, the employer’s agent, could not validly certify practical completion.
In a judgment dated 7 December 2018,the High Court rejected Mears’ claims and Mears appealed.
Determination of the Agreement for Lease
Lord Justice Coulson stated that in his view, ‘the parties to contracts of this sort are entitled to agree, in advance, that a breach of a particular clause amounted to a material or substantial breach of contract.’ The issue was whether the parties did so.
He stated that it would be ‘commercially unworkable’ if every such departure from drawings had to be regarded as a breach of contract. The parties recognised this and addressed it in the contract by way of creating a benchmark. It stated that if the size of the room was ‘materially affected’ by the departure, it would be a breach of contract if the effect on the room size was ‘material’. The parties went further and agreed that ‘material’ in these circumstances would mean a 3% reduction in any room.
The parties, however, did not say in the contract that such breach itself would be considered ‘material’. Lord Justice Coulson stated that such an agreement would have led to a very uncommercial result and would mean that every room would be the subject of minute measurement and that one failure would result in a material breach allowing Mears to determine the Agreement for Lease. The Judge held that it was a question of degree whether the breaches were ‘material’.
Lord Justice Coulson concluded that the parties did not agree that the breach amounted to ‘material or substantial’ breach of contract and dismissed the appeal.
Certification of completion
Lord Justice Coulson briefly summarised the law relating to practical completion:
- Practical completion is easier to recognise than define;
- The existence of latent defects cannot prevent practical completion;
- In relation to patent defects, there is no difference between an item of work that has yet to be completed and an item of defective work which requires to be remedied;
- Practical completion can be summarised as a state of affairs in which the works have been completed free from patent defects, other than ones to be ignored as trifling;
- Whether or not an item is trifling is a matter of fact and degree, to be measured against ‘the purpose of allowing the employers to take possession of the works and to use them as intended’ but this should not automatically mean that if a property is capable of being inhabited, the works must be regarded as practically complete;
- The case law does not support the proposition that the mere fact that the defect was irremediable meant that the works were not practically complete.
He re-emphasised that he rejected the contention that any failure to meet the 3% tolerance automatically amounted to a material breach of contract. He did not doubt that the parties to a construction contract are in principle able to agree what could be considered practical completion but, he stated, this did not happen here.
Lord Justice Coulson further stated that none of the standard forms of building contract seek to provide such guidance and control. He stated that ‘in the absence of any express contractual definition or control, practical completion is, at least in the first instance, a question for the certifier’.
In the judge’s view, this left the question of the irremediable nature of the breaches and the issue as to whether or not the defect is capable of economic repair is a matter that goes to the proper measure of loss, not to practical completion. For these reasons, he dismissed this ground of appeal.
What does this mean?
The term ‘practical completion’ is uncertain and very often disputed. Lord Justice Coulson emphasised that his summary is not an exhaustive definition and ‘a certain caution is necessary when considering these authorities’. Whether a property is practically completed will depend on the facts.
In this case, it can be argued, that Mears was forced into a lease of a building that was built in breach of the express agreement. This, however, was mitigated by the fact that Mears will be able to issue proceedings to remedy this by claiming damages for breach of contract.
It is not uncommon for contracts not to have a definition of ‘practical completion’. In such cases, it is likely that the Courts will try to determine the ‘intent and purpose’ of the building, subject to caveats noted above. The Court stated that ‘When the building is intended to house people, that [leads] to an emphasis on it being fit for occupation by such people.’
This judgment emphasised the requirement to be precise in drafting contracts. If the contract explicitly specifies ‘practical completion’, it is less likely that there will be any disputes concerning the construction clause.