Court of Appeal considers the issues of practical completion.

CASE UPDATE: Mears Limited v Costplan Services (South East) Limited and Others [2019]

A provider of student housing Mears Limited (“Mears”) in May 2016, entered into an Agreement for Lease (“AFL”), which provided for Mears to take a 21 year lease with the landlord, Plymouth (Notte Street) Limited (“PNS”) and the developer, J.R. Pickstock Limited (“Pickstock”). The AFL was for two blocks of student accommodation.

Mears contracted with PSN to take a long lease, which would complete within five days of practical completion of the two blocks of accommodation; there was a long stop date of 11 September 2018 so if practical completion did not occur by this date then Mears would be entitled to terminate the lease under the AFL.

PNS engaged with Pickstock to design and construct the development under a JCT Design and Build Contract dated 27 May 2016. On 25 November 2016, PNS appointed Costplan Services (South East) Limited (“Costplan”) to act as its agent in respect of the construction of the development.

The Dispute

Clause 6.2.1 of the AFL prevented PNS from making any variations to be building works which would materially affect the size of the rooms. Any reduction of more than 3% from that stipulated in the contractual drawings was deemed to be material.
In May 2018 a number of issues were raised by Mears, in respect of the works that had not been completed and the quality of those already completed, in particular regarding the size of the rooms which were smaller than the AFL contractually permitted. The alleged breaches were in respect of clause 6.2 and 6.2.1 of the AFL which provided that:

• “6.2. The Landlord shall not make any variations to the Landlord’s Works or Building Documents which:
  6.2.1. materially affect the size (and a reduction of more than 3% of the size of any distinct area shown upon the Building Documents shall be deemed material), layout or appearance of the Property”

Mears served a defect notice under the AFL on 4 May 2018 and alleged one of the student residences, had been built more than 3% smaller than the contractual drawings, constituting a breach of clause 6.2.1. Mears argued they were entitled to terminate the lease due to the breach, as they would be unable to obtain a certificate of practical completion, which resulted in a material and substantial breach of the AFL. Mears stated that as the size of the rooms could not be increased therefore the breach could not be remedied.

Decision in the First Instance

There were 56 rooms discovered by Waksman J sitting in the TCC, which were built more than 3% less than that specified in the contractual drawings, but despite this Waksman J refused to grant declarations that failure to meet the criteria set out in the AFL is a material and substantial breach, a breach of clause 6.2.1 that would entitle the AFL to be terminated by Mears or the breaches would prohibited practical completion. Waksman J indicated each case is to be based on its own merits; otherwise the slightest defect in any contract could be seen as a cause for termination – an approach that is not commercially viable in any market. Any party who is unable to terminate an AFL that contained minor, but irremediable defects would at least be mitigated by the fact they would be entitled to damages for the breach.

Mears appealed in the Court of Appeal, contesting that any departure from the wording at clause 6.2.1 should be deemed to be a material breach.

Decision in the Court of Appeal

Coulson LJ in the Court of Appeal, dismissed Mears’ appeal from Waksman J’s decision in December 2018. The Court of Appeal last considered practical completion in 1969 (Jarvis & Sons Ltd v Westminster Corporation), so this was the first time in 50 years the Court of Appeal considered the meaning of practical completion. Coulson LJ agreed that parties could contractually stipulate whether breach of a particular clause amounted to a substantial or material breach of contract, he held that failure to construct the rooms at the correct size, no matter the reason or how trivial, the difference was a material and substantial breach of the AFL.

It should also be recognised that without any expressed definition in the contract, practical completion in the first instance is to be defined by the certifier, Costplan in this case were the certifier and they thought the 3% variation was trivial, whether or not the view was correct, Coulson J mentioned that this was not a topic to be discussed as part of this appeal. Coulson J held that whether the property could be used for its intended us and be habitable by students does not mean practical completion has occurred. A patent defect to the property regarded as trivial cannot prevent practical completion whether or not capable of repair, however if the defect is considered to be more than trivial, whether or not it is capable of remedy then it will prevent practical completion. Mears did consider the defects to be more than trivial, as there were 56 separate failures where the rooms were 3% too small, which when broken down creates 56 potential breaches under the AFL.

Coulson J had to consider whether or not the issues are capable of remedy and it came down to the measure of loss incurred, not to practical completion and whether a certificate could be issued finalising the works.

The appeal was dismissed and Wakeman J’s decision in the first instance was affirmed by the decision in the Court of Appeal. Coulson J provided a reminder of the distinction between materiality of how serious a breach of contract is and materiality of the extent of variation in the works from the construction drawings and reiterated that “the fact the defects in question may be incapable of economic repair was irrelevant to the question of practical completion”; as previously decided in the first instance by Wakeman J.

Conclusion

It would seem that there is no clear rule to determine practical completion and it is something that is easier to recognise than define. The mere fact that a defect is not capable of being repaired, does not automatically prevent practical completion.
Clause 6.2.1 of the AFL deemed that a reduction in size greater than 3% would be a material variation. This is relevant because as can be seen from clause 6.2, PNS as landlord were prohibited from making variations from the construction drawings. The ability to establish a variation to the AFL was seen as a pre-condition before a breach of contract, providing a mechanism for parties to ensure there was a consensus between the parties when a change could be categorised as a variation. On reading clause 6.2.1, the reference to variation is clearly referring to variation on the size of the property and not the consequence of a breach.

Despite the outcome of this case it is important to recognise that any case in respect of the subject of practical completion will continue to be assessed on a case by case basis and therefore has the potential for continued uncertainly on the topic and a number of disputes in the construction industry.

Article submitted by Mark James, Partner – Dispute Resolution, Coffin Mew.

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