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Luxury developments: Delivering the vision (Part 3) – Construction & Planning


Luxury developments: Delivering the vision (Part 3)

Previously in this three-part luxury development series, we
considered:

  1. matters which developers should consider during the pre-tender stage of luxury development
    projects
    , including developing a clear overall vision and
    design intent for the project

  2. the contracting phase of luxury development
    projects
    , including ensuring the contractual framework supports
    the developer’s vision and limits the developer’s risk
    exposure.

In the final part of this series, we discuss the management of
works during the contract period and the ultimate delivery of
luxury development projects.

Managing the construction work

As touched on in the previous parts of this series, the
developer may elect to have varying levels of involvement in the
progression of the works throughout the course of the project.
Depending on the developer’s intended level of ongoing
involvement in the works, it may be necessary to appoint a third
party superintendent or principal’s representative to manage
the progression of the works on the developer’s behalf.

In deciding what level of ongoing involvement is necessary (or
appropriate) for a developer, it is worth considering the
following:

  • who is responsible for the day-to-day management of queries
    from the contractor? It is important that whoever is undertaking
    this task be wary of issuing any instructions to the contractor
    which may amount to a variation of the works under the
    contract

  • in circumstances where the design was not finalised before the
    works commence, who will be responsible for confirming and
    approving design choices, including product selection and finishes?
    Are there any restrictions on when and how these decisions need to
    be finalised and communicated to the contractor so as to not
    unreasonably delay the works?

  • who will be responsible for ensuring that the developer’s
    design intent is met and dealing with situations where the
    contractor is not meeting the required standard? It is important
    that any instructions given in respect of rectifying defective or
    substandard works are done in such a way that they do not come
    across as an instruction or direction to vary the works under the
    contract. To this end, it may be worthwhile to consider
    implementing ongoing, progressive independent reviews of the works
    to ensure they are being carried out in accordance with the
    required design and quality standards.

In circumstances where the developer elects to take an active
role in the works, such as by sourcing materials or making ongoing
decisions on site, the developer should be wary that, if these
matters have not been appropriately accounted for in the contract,
the developer could end up in a situation where their actions
amount to a cause of delay or a variation to the contract.

Also, the developer should be aware that if the contract does
not allow for changes in the programme or work sequence, any
direction given to the contractor to accelerate certain works or
complete works (including defect rectification works) out of
sequence to complete certain residences for settlement purposes may
result in the developer being liable for any time and/or costs
incurred by the contractor as a result of the direction.

Rectifying defects and non-conforming works

Once the works are largely completed, the developer will have
the opportunity (subject to the terms of the contract) to require
the contractor to rectify any defective or non-conforming works. In
a luxury development, the developer will want to have settlement
occurring (and tenants moving in) as soon as possible after the
works are completed. As such, it is important that the contractor
on the project:

  • rectify any defects to a high standard and in a timely
    manner

  • be obligated to re-visit the site as necessary to rectify
    defects as they become apparent

  • be obligated to work around any tenants or occupiers that have
    moved into the development before the rectification works occurring
    and/or being completed.

A contractor’s liability for rectifying defects may be
affected by the capacity in which the contractor has been engaged
and the nature of the contractor’s obligations under the
contract as a whole. For example, the following factors may support
a position that a contractor is not liable for defects if:

  • the developer selects and pays subcontractors or suppliers
    directly

  • the developer enters into contracts for works and materials
    either directly or by the contractor acting as an agent of the
    developer

  • the contractor has no legal ability to require work to be
    performed or rectified by those engaged by the developer or to
    recover compensation for faulty work performed or materials
    supplied

  • the contractor is being paid a fixed fee and does not receive a
    margin on the cost of labour or material.

It is therefore important that contracts for luxury developments
clearly state the contractor’s obligations regarding the
rectification of defects, including (if necessary) circumstances
where the developer directly engages any subcontractors or
suppliers.

Project delays and poor workmanship – what the courts say

It is also important to note that in circumstances where a
contract does not include detailed drawings, plans or
specifications (as we discussed in earlier parts of this series),
any warranties provided by the contractor as to the nature and
quality of the finished product may be limited in scope to what was
known (and therefore able to be warranted) at the time the parties
entered into the contract.

Developers should therefore be careful to ensure that the
contract expressly and clearly describes the standard of work the
contractor must deliver at completion. It is this standard of work
that the works should be assessed against when considering defects.
This is especially important if the standard wording of the
contract refers to the relevant statutory warranties. Even in
circumstances where both parties have discussed the construction of
a ‘luxury development’ and the contractor has been engaged
on the basis of a mutual understanding that the development is to
be luxury in nature, if the contract does not expressly stipulate
that ‘luxury’ workmanship and quality is required (and
describes what ‘luxury’ means to the developer), the courts
will not infer or imply a greater standard than that expressly
stipulated in the contract.

To achieve that outcome, the developer would need to apply to
the court for the equitable remedy of rectification of the
contract. However, this requires the developer to prove on the
balance of probabilities what the parties’ common intention
was. While the United Kingdom has determined that the parties’
actual common intention is relevant for this remedy,1
this has not yet been applied in Australia, with the objective
common intention of the parties still potentially the test
here.

Failing that, and if the contract is otherwise silent as to the
standard of work, the relevant standard of work will be that
contained in the statutory warranties (i.e. reasonably fit for
purpose), which will typically be well below that envisaged for a
luxury development.

Finally, if a contractor simply does not complete its works to
the standard required by the contract, developers should be aware
that, even if it can be established that the contractor has
breached the contract, the courts will not always award the amount
necessary to rectify the works to the standard required under the
contract. The courts generally apply a test of ‘necessity and
reasonableness’ to determine whether awarding rectification
damages or an award of damages for loss of amenity is more
appropriate in the circumstances.

During this assessment, the court commonly takes into account
the following factors:

  • the degree of departure from the contractual requirements

  • the impact on the functional utility, amenity and aesthetic
    appearance of the works

  • the reason (commonly known to the parties) for which the
    breached requirement was included in the contract

  • the practicality of rectifying the defective work, including
    the effects on third parties and whether the rectification works
    would detract from the peace, comfort and amenity of others

  • whether or not the owner, developer or principal actually
    intends to carry out the rectification work

  • the cost of the rectification work and whether that cost is
    disproportionate to:

    • the value of the development or building and the contract
      price

    • the reduction in commercial value of the development or
      building

    • the effect of the departure on the functional utility, amenity
      and aesthetic appearance of the development or building.


  • the contractor’s liability for the defect.

Below are some examples of situations where the courts have
determined that rectification was unreasonable:

  • a contractor had constructed a pool to a depth of six feet six
    inches, despite the home owner requesting the pool to be at a depth
    of seven feet six inches. The home owner had specifically requested
    this depth so he could dive into the pool safely. The court held
    that the cost of rectifying the pool was disproportionate to the
    loss actually suffered by the home owner, in circumstances where
    the pool could be used safely. The court also considered that the
    home owner was not necessarily intending to undertake the relevant
    rectification works (but rather, merely seeking payment of the
    rectification costs). The court held that despite the shallower
    depth being a failure to achieve the precise contractual objective,
    it was not a total failure. In the context of the whole scenario,
    it was more appropriately a lack of amenity giving rise to a
    general damages award2

  • a contractor was engaged to construct the framework for an
    apartment with high ceilings of 2,700mm. However, the ceiling, as
    constructed, was on average 48mm less than the height required in
    the contract. The court held that the degree of departure from the
    contract favoured an award of rectification, but in the greater
    context, rectification was considered inappropriate and
    unreasonable. In reaching this conclusion, the court considered:

    • the effect that rectification would have on the building as a
      whole and other tenants

    • the home owners paid for a luxury apartment, the premium
      elements of which included its location, views, architectural
      design, floor space and ceiling height. All but the ceiling height
      were delivered

    • the loss of amenity against the price paid for the
      apartment

    • the ceiling remains high (albeit not to the extent
      contemplated, which was admitted to affect some aesthetic
      perspectives and loss of amenity in terms of use of the relevant
      space).3


  • defective building work in home units which had been sold and
    the owners were not asking for rectification work to be carried
    out. There was no evidence of reduction in the sale price and no
    intention to carry out the rectification work.4

Costly (and arguably disproportionate) rectification has,
however, been considered appropriate in certain circumstances where
it can be shown that the rectification was necessary to achieve the
intended purpose of the contract.

An example is where a contractor installed inferior or
second-grade limestone cladding in a home renovation when the
contract specifically required that ‘high quality’
limestone be installed. Despite the cost of the rectification works
($258,000.00) being arguably disproportionate to the value of the
home ($1.7 million), the court determined that the home owner

was entitled to the performance of the contract to achieve the
contractual objective, irrespective of others views as to what may
be aesthetically reasonable.5

As can be seen from the above examples, what is considered
reasonable will differ from case-to-case and will be wholly
dependent on the circumstances of each individual scenario,
including the contract as a whole, the extent to which the
contractor has failed to deliver the works under the contract and
the nature and extent of rectification works (including cost, time,
safety, disruption, and overall added benefit).

Conclusion

The best way for developers to protect their interests
throughout the life cycle of a luxury development is to ensure that
they are armed with a contract which specifically reflects and
accounts for the particular circumstances of their individual
development.

Whilst it may not be possible to account for all of the unknowns
that may arise throughout the life of a project, taking the time,
pre-contract, to carefully consider and account for what is known
at the time and how the developer envisages the project unfolding
will not only minimise the risk of disputes arising but also work
to ensure that the ultimate product delivered is in line with the
developer’s luxury vision.

Footnotes

1 FSHC Group Ltd v Glas Trust Corporation
Ltd
[2020] Ch 365; [2019] EWCA Civ 1361.

2 Ruxley Electronics & Construction
Ltd v Forsyth
(1996) 1 AC 344.

3 Stone v Chappel [2017] SASCFC
72.

4 Westpoint Management Ltd v
Chocolate Factory Apartments Ltd
[2007] NSWCA
253

5 Willshee v Westcourt Ltd [2009]
WASCA 87.

This publication does not deal with every important topic or
change in law and is not intended to be relied upon as a substitute
for legal or other advice that may be relevant to the reader’s
specific circumstances. If you have found this publication of
interest and would like to know more or wish to obtain legal advice
relevant to your circumstances please contact one of the named
individuals listed.



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