article
Damage limitation
10 March 2010
Despite the recent recession, the care home sector continues to
grow at pace. Established providers are expanding and new
stakeholders are entering the market creating a need for new build
properties to accommodate the increased (and increasing) demand for
care homes.
Purchasing any care home entails a significant long term
financial commitment and comes with a familiar package of unknown
risk, regulatory requirements and challenges in securing funding.
Throwing a new build property into the equation adds another
dynamic, which is often understated or overlooked. Whilst surveys
and inspections of a new build prior to purchase can help to
uncover hidden surprises to a certain extent, they can rarely give
peace of mind about what is not physically apparent. Such latent
defects, by their very nature, remain an unknown quantity.
The effect of this is highlighted when considering what happens
if a structural defect is found after purchase of the care home,
which requires remedial work. Obviously, the works must be carried
out, to avoid them posing a risk to residents, staff and visitors.
This will inevitably have a cost consequence. But will the care
home provider have any right of redress against a third party to
recover its outlay? In these circumstances, the general principal
known as caveat emptor or “buyer beware” applies. The care home
provider has bought at risk and would not usually have any right of
redress against the seller.
The disgruntled care home purchaser may then turn its attention
to the construction team whose sub-standard workmanship or design
caused the defect in the first place. However, over the last 20
years, the courts have made it clear that owners and occupiers of
buildings require a contractual remedy in order to pursue claims
for certain types of losses including the economic loss of repair
works. So, the only party who is likely to successfully sue the
construction team for negligence is the developer who commissioned
the works and engaged the construction team.
Plugging this gap, collateral warranties have become an
established method of providing purchasers with that all important
contractual remedy. They are a direct contract between the
contractor or design consultant and the party purchasing a
property. If used, they will establish a duty of care in the
purchaser’s favour which will enable it to bring a claim against
the negligent contractor or consultant, in the event of a defect
materialising which causes loss. This right usually lasts for 12
years from completion of the property.
Collateral warranties themselves come in various forms, although
they do contain common clauses, such as a requirement on the
professional to exercise skill and care, a promise that they have
and will continue to perform the underlying contract, an obligation
to carry out and maintain professional indemnity insurance which
can be called upon in the event of a breach and an ability to
assign the collateral warranty in the event the care home is sold
on at a later date. As with any legal documents, great care needs
to be taken in drafting and agreeing the precise wording of the
collateral warranties to ensure that a purchaser has sufficient
rights and remedies against the contractor or consultant.
Collateral warranties are therefore a vital means of protecting
care home purchasers against what cannot be seen. To maximise the
chances of obtaining them, they should be considered by the seller
or potential seller at the outset of a new construction project.
The building contract and consultants’ appointments must include
the necessary provisions to enable the seller to procure collateral
warranties in a reasonably acceptable form, when required to do so.
Leaving this until the eventual purchaser is on board is likely to
be too late.
As well as offering first hand security to a care home
purchaser, collateral warranties may help when financing the
transaction. The collapse of the property market in the late 1980s
highlighted the inadequate security arrangements that banks had in
place, leaving them and their clients exposed to potential large
bills for remedying defective works without recourse. Out of this
period, banks and other financial institutions have realised the
importance and appeal of collateral warranties and their provision
now often forms part of standard bank security requirements.
The ability of a seller to procure warranties in an acceptable
form in favour of care home purchasers and financial institutions
is therefore of paramount importance. This will not only provide
the care home purchaser with a potential means of redress against a
negligent contractor or consultant in the unhappy event that a
defect materialises necessitating remedial works, but also to
secure any funding required to finance the transaction.
This article was first published in Caring Times
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