Laurence Cobb and Aine McCartney, part of the construction team at international law firm Taylor Wessing, discuss what high net worth individuals and their advisors should be aware of when employing a contractor on a construction site.

Editor's note: In this article, Laurence Cobb and Aine McCartney, part of the construction team at international law firm Taylor Wessing, discuss what high net worth individuals and their advisors should be aware of when employing a contractor on a construction site. At a time of such focus on the luxury property markets such as those of London, this advice is particularly timely, not just for HNW individuals themselves, but for their advisors. As ever, while this publication is delighted to share this advice, it does not necessarily endorse all the views expressed here. 

Levels of investment by HNW individuals, or their investment vehicles, continue to soar into prime or super prime residential or commercial opportunities and according to research recently conducted by LuxuryEstate.com, interest in properties worth over €1 million ($1.3 million) has increased by 2 per cent in the past year. 

As an investment is made into a development opportunity, this is invariably followed by a period of renovation or other works being carried out to the building. It is during this time that a dispute of some kind is likely to occur.

Over the past few years, this trend has been highlighted with a dramatic rise in the number of cases of this nature coming across our desks on a daily basis.

When two parties enter a dispute it can be very costly both financially and to the all-important development schedule, not to mention the significant management time that can be spent dealing with it. Time is of the essence when developing a site and delays can significantly affect the success of a development. 

It is therefore important that HNW individuals or their advisors are aware of several important issues and measures that should be considered when employing contractors on site. If considered carefully, the risk of a costly dispute arising with a builder could be reduced.

Putting the right structure in place

When significant renovations or other building works are being carried out to an investment property, it is important that consideration should be given to the structure of the investment. 

·        Consider how much involvement the investor wants in the project. For example will a development manager run the project? Who is to be the "employer", e.g. will there be a special purpose vehicle?

·        Consider allocation of design responsibility between the architect and the builder.

·        Make sure the contract is in writing and sets out key terms, for example price, a description of the works, and timescales for the works.

·        Consider using one of the standard form contracts used commonly in the industry, for example JCT Forms which will cover the key issues, with specific amendments as required.

·        Deal with issues such as planning, listed building consent and party walls as early as possible to avoid potential issues occurring later on in the development schedule.

Payments to builders

Payment is often one of the most contested areas of a development when issues arise.  However, in most cases, builders have a statutory right to regular payments throughout the works.  The employer should comply with statute or the contract regarding payments to try and avoid payment issues becoming a full dispute. 

·        Every application for payment submitted should be reviewed promptly to decide how much is due.

·        Payment should be made in line with the timescales set out in the contract.

·        If there are delays, defects or incomplete works, and the amount due is lower than the amount claimed, a written notice should be given setting out the amounts to be deducted and the reasons for the deductions.  This is known as a withholding notice and again must be submitted in accordance with the relevant timescales.

·        If payment is not made and no withholding notice is submitted, the builder could be entitled to be paid regardless of the issues in the works, they could stop working, or they could start an adjudication.

Defects in the works

This is an area which is potentially ripe for disputes to occur, especially where the investment is to a high specification. A number of issues can arise over the standard of the work done and it is important, if this does occur, that a series of actions are taken: 

·        A written notice should be given to the builder as soon as possible which describes the defect and what is needed to fix the defect.

·        Check the contract to see whether there is a provision which states how quickly the builder has to fix any defects. 

·        If the builder still does not remedy any defects, the employer may be able to organise for another builder to fix the defects.  Those costs would then be recoverable from the builder, or could be deducted from any monies retained from the price of the works.

Delay to the works

Delays to the works are also a very hot area for a dispute to occur between the employer and the contractor. These should be dealt with in accordance with the contract. 

·        Typically, the builder should notify that there has been a delay and outline the causes of that delay.

·        If the delay is caused by the employer (for example, if the employer changes the works), the builder may be entitled to an extension of time, i.e. where the completion date is extended, and their costs.

·        However, where the delay is caused by the builder, the employer may be entitled to deduct a fixed sum per week from the builder (known as liquidated damages).

Disputes

Although steps can be taken to minimise the possibility, disputes may still occur.  At this stage it is vital that they are dealt with as quickly and as efficiently as possible, particularly with adjudications. Points which should be noted include:

·        Adjudication is a fast-moving and expensive dispute resolution mechanism often used by builders to ambush the employer.  It is compulsory in most construction contracts, but does not apply if the property is to be occupied by the investor as its residence, so could be excluded. 

·        If a Notice of Adjudication is received, there are very short timescales for dealing with it (usually 28 days for the whole process) and, therefore, action should be taken immediately to obtain advice.

·        Litigation or arbitration could also be used to resolve any disputes, although these are usually considerably longer and more expensive.