Practical completion is a term that is used to describe building works which are substantially complete and capable of use, notwithstanding there may be some outstanding snagging items.
Practical completion of a development is often used as a trigger, in development agreements or agreements for lease, for completion of the underlying sale or lease. But if you look for a more detailed definition, it will usually just refer to ‘practical completion as defined in the building contract’.
In a building contract practical completion is an important milestone, it will usually trigger release of a significant portion of any retention monies, and start the clock ticking on the defects liability period, and the limitation period for any claims to be brought.
So what does the building contract say? Most standard form building contracts do not define practical completion, they simply provide a mechanism for certifying that it has been achieved. This leaves fertile ground for disputes. Can we say that practical completion has been achieved where the works contain significant defects? How significant do they have to be? What if they are latent defects? What if practical completion is certified incorrectly? There are potential implications for any related lease, sale, and the liability of the building contractor for defects.
Fortunately the Court of Appeal have recently, for the first time in 50 years, considered the meaning of ‘practical completion’ in Mears Ltd v Costplan Services (South East) Ltd and others.
This case related to an agreement for lease between Mears (tenant) and J R Pickstock Limited (developer), Mears agreed to take a 21 year lease of two blocks of flats for an annual rent of £1,666,667.00, following completion of their construction. The key terms of agreement for lease were:
- If practical completion was not achieved by the longstop date, either party could give notice of termination.
- Issue of the certificate of practical completion would be in the sole professional discretion of the employer’s agent.
- A reduction in size of more than 3% to the size of the rooms shown in the contract drawings would be material.
The works were delayed and Mears alleged some rooms were more than 3% smaller than specified. In spite of this, the employer’s agent indicated that it intended to issue the practical completion certificate – just prior to the longstop date.
Mears applied to Court to issue an injunction restraining issue of the certificate and a declaration that a reduction of more than 3% in the size of the rooms a was material breach which should prevent practical completion. If Mears was correct, it could terminate the agreement for lease and walk away, leaving Pickstock (who had financed the development over 2 years) with a completed property, no tenant and lost rental income of £35million.
At first instance the court refused and held that Mears’ arguments were ‘commercially absurd’. On appeal, Coulson LJ upheld the decision and said it would be ‘commercially unworkable’ if every departure from contract drawings had to be regarded as a breach preventing practical completion, even if it was a material breach of contract.
Coulson LJ went on to review previous authorities on practical completion and summarise:
- Practical completion is easier to recognise than define.
- The existence of latent defects cannot prevent practical completion, since nobody knows about them.
- In relation to patent defects, there is no difference between an outstanding item of work and a defective item of work. Snagging lists can, and will usually, identify both.
- It has been held that practical completion is a state of affairs in which works are “free from patent defects, other than ones not to be ignored as trifling”
- Whether or not a defect is trifling is a matter of fact and degree, depending on the circumstances.
- That fact that a defect may be irremediable does not preclude practical completion.
Perhaps not the outcome that Mears’ hoped for, but useful guidance for the rest of us.