Methods Of Protection For Lenders, Purchasers And Tenants Involved In Construction Projects And The Impact Of The Contracts (Rights Of Third Parties) Act 1999 On The UK Construction Industry

The Need To Provide Remedies For Lenders, Purchasers And

Tenants

Those who provide the finance for a new development or who

acquire an interest in it, either as purchasers of the original

owner's or developer's interest or as tenants of the

completed building, will often be exposed to varying degrees of

financial risk in the event of the defective performance by one

of the parties involved in the design or construction of the

building. Lenders to the developer will require that in the

event of a developer's default they should have the ability

to realise their security and "build out" of the

difficulty, as well as having direct claims against contractors

and consultants for their defective performance in the

construction process. Potential purchasers may also sometimes

need the right to "step in" and secure the completion

of the development, and they and tenants will require remedies

if, after completion, defects emerge. Also, the original owner

may himself need direct remedies against his contractors'

and consultants' own sub-contractors.

Since the late 1980's it has been clear that such

remedies must be in contract. In D&F Estates Ltd v The

Church Commissioners for England [1989] A.C. 177 and

Murphy v Brentwood District Council [1991] 1 A.C. 398,

the House of Lords removed the possibility of claiming in the

tort of negligence for the economic losses

(repair/reinstatement costs) flowing from defective building

work. As recent developments in tort liability have not

resurrected the possibility of tort claims in this context,

contractual mechanisms will remain as the sure method of

protection for lenders/purchasers/tenants.

Methods Of Protecting Lenders, Purchaser And Tenants By

Contract

There are different ways in which protection can be given.

Since the late 1980's, the practice has grown of requiring

contractors, sub-contractors and consultants to enter into

collateral warranties for the benefit of lenders, purchasers

and tenants, and sub-contractors to enter into warranties for

the benefit of the original owner/employer. Providing

collateral warranties has become the industry standard for

protecting such parties.

There is also a possibility in some circumstances of the

original owner/employer having claims under his contracts for

damages to cover losses suffered by third parties such as

purchasers and tenants. Sometimes a person with a right against

a contractor, sub-contractor or consultant will be able to

transfer that right to another...