Sale and Purchase Agreements – why construction clauses matter

When buying premises off plan, or that are newly constructed, purchasers will be familiar with the need for a full suite of collateral warranties to ensure that they have appropriate remedies against the design and construction team should defects arise in the future. However, the case of WOL (London) LLP v Croydon Investments Ltd and others [2024] EWHC 251 (TCC) demonstrates that the provision of these collateral warranties is without prejudice to, and does not negate the importance of, the primary construction obligations of a seller which are often included within sale and purchase agreements.

Background

The case concerned a summary judgment application by Croydon Investments Ltd (Croydon Investments), to strike out a claim for breach of construction obligations in a sale and purchase agreement on the basis that it had no real prospects of success.

Croydon Investments contracted with RGB P&C Limited (RGB) to carry out and complete works to convert an office complex into 82 residential apartments in Croydon with a contract sum of £7,120,564.82. The works were certified as being practically complete on 5 December 2016, subject to a snagging list and shortly thereafter Croydon Investments entered into a sale and purchase agreement  (SPA) with WOL (London) LLP (WOL) pursuant to which WOL agreed to purchase the completed property for £22,958,621. The sale completed in January 2017.

Understandably, WOL wanted to ensure that the building was free from defects. As it completed its purchase of the property during the 12 months defects rectification period, WOL included bespoke provisions in the SPA which provided that:

“4.1      [Croydon Investments] warrants that it shall comply with the terms of and carry out and fulfil its duties and obligations under the Building Contract including but not limited to the issue of any relevant schedule of Defects during the Rectification Period and the issue of the Notice of Completion of Making Good.

4.2       [Croydon Investments] shall procure that the obligations of [RGB] under the Building Contract are complied with up to the issue of the Notice of Completion of Making Good and [Croydon Investments] shall not waive, vary, alter, assign or novate or otherwise change the obligations of any party under the Building Contract without obtaining [WOL’s] prior written approval …

4.3       [Croydon Investments] shall procure that the Employer’s Agent prepares a schedule listing any Defects pursuant to the Building Contract and supplies a copy thereof to [WOL] and the [WOL’s] Surveyor not earlier than fifteen Business Days or later than ten Business Days before the expiry of the Rectification Period. [WOL] and/or [WOL’s] Surveyor may make representations to the Employer’s Agent by listing any Defects which they have observed and [Croydon Investments] shall procure that the Employer’s Agent shall have due regard to such list provided that nothing in this paragraph 4.3 shall fetter the Employer’s Agent’s independent discretion.

4.4       Prior to the issue of the Notice of Completion of Making Good, [Croydon Investments] shall provide [WOL] and [WOL’s] Surveyor with not less than five (5) Business Days prior written notice of its intention to carry out an inspection of the Works with a view to issuing such notice, so that the [WOL, [WOL’s] Surveyor and their representatives may attend such inspection (and, where appropriate, re-inspections). [Croydon Investments] shall procure that [WOL] and [WOL’s] Surveyor may make representations to the Employer’s Agent and/or [Croydon Investments] (either at the time of the inspection or within five (5) Business Days following such inspection) and [Croydon Investments] shall procure that the Employer’s Agent shall have due regard to such representations, provided that nothing in this paragraph 4.4 shall fetter the Employer’s Agent discretion to issue the Notice of Completion of Making Good.”

Notwithstanding these obligations, WOL subsequently discovered substantial defects in the works affecting the ventilation system, hot and cold water supply, external cladding and fire compartmentation. After undertaking an initial scheme of remediation works to rectify some but not all of these defects, WOL sold the building in 2022 for £8.3million, representing a substantial loss on its original investment.

Thereafter, WOL commenced proceedings to recover its losses against (a) Croydon Investments for breach of the terms of the SPA (b) RGB, pursuant to a collateral warranty issued in favour of WOL and (c) the Building Inspector, Stroma. The sums WOL claimed amounted to:

• £14,658,62, being the difference between the price paid for the property and the monies received on its eventual sale
• £165,176, being the sum incurred to rectify the snagging defects
• £85,583, being the sum paid to rectify defects in the ventilation system
• £704,074 being the costs incurred in investigating and managing the dire defects
• £1,285,193 representing lost rental income.

In applying for summary judgment, Croydon Investments argued that WOL’s claim against it be struck out on the basis that:

• Liability for the cost of rectifying defects falls with the scope of the collateral warranties issued by both RGB and Stroma.
• Pursuant to the terms of the SPA its liability was limited to the cost of rectifying the patent defects and snagging items, and not latent defects which were subsequently discovered.
• WOL had not pleaded a sustainable cause of action against it.

The decision

In considering the application, Roger Ter Haar KC had to determine whether WOL’s construction of the SPA, which effectively imposed an obligation on Croydon Investments to ensure RGB’s compliance with the building contract, was arguable. In doing so the Judge held that whilst at the time of entering into the SPA both RGB and Stroma had substantial assets or means of satisfying any liability for breach of the terms of their respective collateral warranties, WOL had an arguable case that this did not restrict the scope of Croydon Investment’s liability under the SPA in circumstances where RGB failed to rectify defects. 

Moreover, Ter Haar KC held that the obligations in the SPA constituted primary obligations on the part of Croydon Investments as is the norm in situations such as this, and which were not restricted by the presence of collateral warranties.

However, the Court noted that WOL had not expressly set out its case against Croydon Investments in the pleadings, particularly regarding causation and directed WOL to provide a re-amended pleading clearly setting out its case against Croydon.

The Birketts view

Of course, in cases such as this the decision turns on the precise wording of the contract. However, in a world where construction industry insolvencies are becoming ever more prevalent, the decision only reinforces the benefit of construction involvement in drafting and negotiating bespoke provisions into sale contracts on transactions where the construction obligations under building contracts and consultant appointments are not at an end at the time of purchase.

Whilst parties will be well used to the benefit of collateral warranties, buyers should take comfort from the fact that the underlying property contract can also act to provide a primary cause of action against a seller in circumstances where recovery of losses, either total or partial, from the construction and design team is not possible.

At Birketts we are proud to offer full-service advice to our clients, meaning that we work closely with our real estate colleagues in transactions such as this to ensure that the relevant property document includes appropriate construction obligations.