Property Focus

Mears Ltd v Costplan Services (South East) Ltd [2019] – when is practical completion complete?

For the first time in 50 years, the Court of Appeal has considered the meaning of “practical completion" as surprisingly, the wording has no industry-standard definition.  The term is often left undefined in building contracts with the decision as to whether a project has reached practical completion left to the professional judgment of the certifier – needless to say, this is a source of numerous disputes.

Determining when practical completion has taken place is not solely of importance in construction contracts – it impacts on a number of property-related documents particularly development agreements and agreements for lease.  Practical completion is frequently the trigger for a number of events, for example: the grant of a lease; the payment of rent; the start of a rent-free period or payment of the purchase price in a development agreement.  In addition, these property agreements will often have a long-stop date allowing the buyer or tenant to be released from the contract if practical completion has not been achieved by that date.

The recent case of Mears Ltd v Costplan Services (South East) Ltd [2019] involving alleged breaches of the terms of an agreement for lease, has been welcomed as the Court of Appeal reviewed key cases and helpfully summarised the law surrounding practical completion.

Facts of the case

Mears Ltd entered into an agreement for lease with the landlord (PNSL) and a developer for two blocks of student flats with the following key provisions:

• PNSL could not make any variations which would materially affect the size of the rooms – a reduction in size of over 3% was deemed material (clause 6.2.1).
• If a certificate of practical completion was not issued by the long-stop date of 11 September 2018, then Mears or PNSL could give notice to terminate the agreement.
• The issue of the certificate of practical completion was at the sole professional discretion of Costplan (the agent for PNSL).

When the flats were finished, Mears alleged that 56 of the rooms were 3% smaller; despite this, Costplan said it intended to issue a certificate of practical completion.  Mears applied to the Technology and Construction Court (TCC) for a declaration that the reduction in room size was a material variation and therefore a breach of contract, which meant that Costplan could not certify completion.

Although the TCC agreed that the rooms had been built 3% smaller than specified, this would not prevent practical completion from taking place.  The court’s view was that a material variation of clause 6.2.1 was not sufficient to result in a substantial variation of the agreement for lease to the extent that it would preclude practical completion.  Mears appealed.

Court of Appeal’s view

The Court of Appeal (CA) dismissed Mears’ appeal and in doing so, provided a useful commentary on determining whether practical completion has taken place:

• Although the reduction of room size was in breach of clause 6.2.1 this did not entitle Mears to rescind the contract – if that was the intention, then that would have to be clearly stated.
• Practical completion is easier to recognise than define and there are no hard and fast rules – so many factors have to be taken into account depending on the project.
• Latent defects cannot prevent practical completion – as the CA pointed out, if no-one knows about these hidden defects they cannot prevent the practical completion being certified.
• Patent defects – there is no difference between items awaiting completion and those which are defective and need to be fixed. Practical completion can be certified when there are no patent defects other than trifling ones – whether a defect is “trifling” is a question of degree and is measured against the employer’s ability to take possession and use the works as intended.
• It is not the case that when a defect cannot be remedied that practical completion cannot be certified in all cases - this case was a good example of that as it would have been impossible to rectify the room sizes without demolition and rebuild, yet practical completion was deemed to have taken place. However, depending on the particular facts, there may be instances where an irremediable breach would prevent practical completion.

Practical points

• Where a breach of a clause in a contract is to constitute a material breach which would lead to rescission, then that must be stated clearly and unambiguously.
• Whether practical completion has been achieved will be governed by the terms of the contract and standard forms of building contract do not provide express drafting. Careful consideration should be given as to whether it is sensible to include additional drafting or whether to leave the decision to the certifier. 
• Where the term is used in a number of related documents in a transaction, it is vital that the definition, conditions and any time limits are consistent throughout. Most building projects have a mix of construction and property documents all with reference to practical completion, so this term (along with other definitions) should be checked across all the documents.

Bevan Brittan’s team of property and construction lawyers routinely consider these points when drafting complex documentation, particularly for regeneration and redevelopment projects when dozens of different documents are involved.  Sometimes, less is more, and leaving practical completion as an undefined term makes sense, but whatever the project we can help you make the right decision.