A recent case in the Scottish Court of Session has considered the extent to which a commonly used exclusion clause in an agreement for lease protected a landlord from ongoing liability for defects in construction works.
The exclusion clause relied on a certificate of making good of defects (“the Defects Certificate”) having been issued and collateral warranties having been delivered. At that point, the landlord would have no more liability to its tenant in relation to construction works. Here the landlord said it had done both. However, the court found that a procedure elsewhere in the Agreement to be carried out before issuing the Defects Certificate was not optional. As a result (and although it was not referred to in the exclusion clause), where the landlord had not followed that procedure there could be no valid Defects Certificate and no exclusion of the landlord’s liability.
This decision will be of interest to landlords, developers and tenants alike.
APCOA Parking (UK) Limited v Crosslands Properties Limited
The case arose from an agreement between owner Crosslands and occupier Apcoa over a multi storey car park at a shopping centre in Fife (the “Agreement”). The Agreement (which included an Agreement for Lease) was entered into before the car park was built. It required Crosslands to appoint a main contractor and a professional team to carry out the works. Following satisfactory completion of the works Apcoa was to take a 25 year tenancy of the car park. As is usual in such agreements, the Agreement had provisions to ensure the works were undertaken to an appropriate standard, including:
- Crosslands had to ensure that the main contractor carried out the works in accordance with the building contract and in a good and workmanlike manner;
- there was a procedure to be followed before issue of the Defects Certificate whereby the project manager had to carry out inspections and Crosslands had to give advanced notice to Apcoa of the final inspection. Apcoa was entitled to attend and to make representations about the works;
- Crosslands was obliged to make good all defects in the works and have regard to all of Apcoa’s representations; and
- Crosslands had to deliver collateral warranties from the main contractor and professional team to Apcoa.
In a typical release or “exclusion clause” the Agreement said once Crosslands had delivered the collateral warranties and the project manager had issued the Defects Certificate, Crosslands had no further liability in relation to the works. No reference was made to the procedure to be followed before issue of the Defects Certificate.
The works were completed in 2008. Crosslands delivered the collateral warranties to Apcoa in September 2008. The project manager issued the Defects Certificate in June 2012. Sometime later the waterproofing coating on the top deck of the car park failed. An estimated £500,000 - £700,000 worth of repair works were required. Crosslands and Apcoa each said the other was responsible for carrying out those repairs. In particular, Apcoa said there had been no final inspection meeting and it had only seen the Defects Certificate in 2015, after it had started court proceedings. Crosslands said the collateral warranties had been delivered and the Defects Certificate issued, therefore under the exclusion clause it had no more liability to make good defects in the works. Who was right?
Landlord liable despite exclusion clause
As usual in construing commercial agreements, the court said its task is to determine the parties’ intention at the time of their bargain. In doing so it said that the procedure in the Agreement before issue of the Defects Certificate was plainly not intended to be optional. To hold otherwise would produce an extraordinary result. Crosslands could benefit from the exclusion clause without fulfilling the contractual scheme. The issue of the Defects Certificate was a significant event in the contractual arrangements. It was the tipping point of liability. The certification process afforded Apcoa an opportunity to check and influence the construction of the works, particularly at the stage of completion and it was entitled to participate in that process.
So, the court said, if there was a failure to comply with the procedure before issuing the Defects Certificate there could be no valid certificate and therefore no exclusion of Crosslands’s liability. Apcoa was entitled to participate in the certification process. The court would be slow to hold in the circumstances that it could be deprived of its right to raise an action in respect of the works against Crosslands.
Conclusions and implications
This decision may come as a surprise to some. The issuing of Defects Certificate is often seen as a “line in the sand” for all concerned. However, the court’s decision in this case was that the procedure before issue of the Defects Certificate was not optional. Therefore (and although it was not referred to in the exclusion clause), where the landlord had not followed that procedure there could be no valid Defects Certificate and no exclusion of the landlord’s liability. Remember:
- This type of exclusion clause is common in agreements for lease. The effectiveness of such clauses may be restricted in the case of non-compliance with other obligations which are not expressly mentioned;
- In such cases landlords’ liabilities do not necessarily end on the issuing of a certificate of making good of defects;
- The court highlighted the importance of the certification process and the opportunity it gave the tenant to check and influence the construction of the works, particularly at the stage of completion;
- Careful compliance with all terms of such agreements will allow both parties to draw an effective line in the sand.