Property Focus | The legal ramifications of unfinished buildings

As one of the hardest hit sectors by the credit crunch and ensuing recession, the construction and real estate industry has suffered severely since the onset of the banking crisis and economic upheaval. With reported figures from The Construction Index for the number of casualties within the construction sector as high as 12,710 insolvent construction and engineering companies in the last three years, the industry has suffered not only from the huge reduction in the value of new-build properties but also the collapse or slowed pace of public building projects.

However, there are modest signs of a recovery, including strong recent trading figures from developers such as Barratt David Wilson Group, who have reported an upturn in profitability recently as they have adapted to the demands of the economic climate. If these results are experienced by other companies within the industry, the knock-on effect will be felt by contractors, sub-contractors, designers, project managers, building merchants, materials suppliers and all other related businesses across the sector. While it is still early days, the indications are there that it may well soon be time for the construction industry to rebuild itself as the country emerges from the recession.

It will not be an easy project, however. One of the key aspects of the crisis has been the number of half-finished construction projects that remain either abandoned or stalled due to developer or contractor insolvency and collapse of demand. Apart from simply being a nuisance to many of the people who live or work in their midst, these half completed projects can be a legal minefield for all involved and contractual disputes can divert the energy and attention of all parties in rebuilding their construction businesses post-recession. One of the key aspects of the recovery will be the way that these projects are dealt with; whether they are taken through to completion or what else is done to move them forward. This is an extremely delicate legal area, with a multitude of ramifications and potential pitfalls.

?Assessing risk

?If a party is looking to recommence construction on an unfinished building or take on responsibility for an incomplete project, it is imperative that they fully understand the hazards and risks in the task and that they are willing to take those risks on or deal with them. The exact situation will vary from case to case depending on factors including the stage of completion, contractual details, the financial state of all companies involved and most importantly, which parties remain solvent.

When an insolvency is involved, the situation is further complicated by the potential for disgruntled employees, designers, contractors or subcontractors. It is important to consider how the insolvency will impact upon the rights of all involved parties. Particular issues that frequently arise are related to which party in fact has ownership of any goods or materials that are currently present on the site and who has the right to use the designs for the building in order to complete it (i.e. is it permissible for an architect to prevent his designs being used to complete the building until he has been paid for them?). A careful review of the building contract, consultants’ appointments, warranties, and so on will be needed in order to properly establish who has what rights.

In most cases, the most prudent and advisable first step for any liquidator or similar insolvency practitioner would be to ensure that the site is vacated as quickly as possible and that it is left safe and fully secured, in order to get time to determine the best way of proceeding to protect the interests of all parties. With potentially valuable materials on site and with the time and money spent on work completed to date, it is crucial to ensure that the site is protected in a safe state and that any potential risks or hazards are clearly considered and dealt with, to eliminate any reasonably preventable danger to any party involved and also to third parties, including trespassers or other individuals using the area near to, surrounding or within the site.

?Sensible and transparent?

When a decision is made about what to do with the site (and the timescale for this may be a week later, a month later or even a couple of years later), depending on the current state of the site and the degree of completion, the next step will normally be to carry out all necessary surveys and investigations to ensure that the structure is sound and that no damage has been caused by trespassers, or the impact of the weather and other environmental conditions on the incomplete structure. The degree of these investigations will vary depending on whether the structure is yet watertight or has any other particular weaknesses caused by being in an extended state of incompletion. Moisture is of course one of the biggest enemies here. In many scenarios, these issues will be easily resolved, but in any case, it is vital that all parties are aware of all the risks from the outset to avoid repercussions later.

However, in many cases, not all of the information (such as the state of works that are not easily or realistically visible or accessible) will be available, which means that new designers, contractors and sub-contractors will not normally take on responsibility for parts of the structure that are not able to be assessed. There is usually some aspect of an incomplete structure that cannot be surveyed, such as foundations. This is why it is often advantageous and expeditious to use the remaining solvent members of the old team that have knowledge of the existing project, and sometimes a phoenix company will be willing to accept responsibility for the work of its insolvent predecessor. There is normally a particular advantage in using the old design team, as that removes all scope for arguments about copyright infringement and intellectual property by ensuring that the old designs are used to finish the building.

The key piece of advice for all parties to remember is to take a sensible and transparent attitude to taking on the responsibility for risks. While it may be tempting for contractors to assume responsibility for risks, they stand to lose a great deal if the project ends up involving copyright disputes with unpaid consultants or requiring unpriced-for remedial work. One of the things I see time and again when a contractor or sub-contractor has gone bust is that for the last few weeks the quality of their work deteriorated dramatically as they tried to cut corners and save costs. A new contractor or sub-contractor should think very carefully indeed before taking on full responsibility for an insolvent predecessor’s work. The effects of taking responsibility for work that has been completed to an inferior standard can be damaging to all aspects of a construction firm, including financially, and equally as crucially, to business reputation.

Even when the construction industry does fully enter recovery, one lasting legacy of the crisis that has faced the industry over the last five years will probably be construction budgets that are much tighter. This will bring with it the potential for a more positive attitude change within all aspects of the construction supply chain, especially with regards to prioritising detailed planning in the first instance to avoid costly mistakes. Scheduling and project management should become more tightly controlled, which will reduce the chance of crises arising in the first place. Nowhere will this change in perspective be more important than when looking at developing abandoned projects, where it is precisely the unknown that makes projects so complicated.

?Repeating old mistakes?

With so much at stake for builders, developers and the sector in general, it will be key to the recovery not only of the construction industry but of the UK economic outlook in general, that proper care and diligence are applied when moving forward with completing unfinished construction projects. The very last thing the sector needs is to find that when stalled projects finally start to move forward, they quickly spawn trouble and litigation due to mistakes made before the downturn suddenly coming to light. An industry already weakened and depleted due to the toll of the recession needs to re-start stalled projects only when they have been fully assessed, to ensure that disputes and litigation are not re-started along with the project.

The steps described above are intended to outline the best ways that all parties can protect themselves in the process of taking on and dealing with incomplete building and construction projects. While there are tentative signs of a recovery in the construction industry, one of the greatest risks will be for parties who rush into completing incomplete projects without taking the necessary precautionary steps and measures to avoid costly legal problems rising from the ashes of the old project.

Another risk when the upturn does fully take hold may well be the temptation for companies to take on more work than can be managed properly by the remaining staff, but that’s another article for another day...