Mears Ltd (“Mears”) v Costplan Services (South East) Ltd and others [2019] EWCA Civ 502 case
The Mears case reviewed a breach of contract, whereby 56 student rooms of a student accommodation development were in breach of tolerance levels specifically set out in the contract. You might assume that such a level of variation would entitle you to terminate the agreement or to claim that practical completion is not achievable. As the Mears case highlights, neither is necessarily the case.
There are two points in the Mears case that are worth considering in the midst of Covid-19 and the stresses that the pandemic is putting on the market, being:
- What might be considered a “material variation” to a contract is not necessarily a “material breach”, entitling a buyer to determine an agreement; and
- Unless ‘termination event’ or ‘practical completion’ are expressly defined then what constitutes practical completion is a matter of fact and degree and it is up to the certifier as whether it has been reached.
Background
Pursuant to an Agreement for Lease (“the Agreement”) Mears contracted to take a 21 year lease from “PNSL”, who had instructed a developer to erect two student accommodation blocks. The grant of the lease was to be completed five days following practical completion of the development.
The Agreement provided that:
- PNSL would not make or permit the developer to make any variations to the specification of the development that would materially affect the size of the student rooms and that a reduction of more than 3% in the size of the student rooms would be deemed material (“Clause 6.2.1”).
- The practical completion certificate was to be issued at the discretion of Costplan (“the Employer’s Agent).
Mears discovered that 56 of the constructed student rooms were in breach of the 3% tolerance allowed under the Agreement. Despite this, the Employer’s Agent considered that practical completion had occurred and intended to issue a practical completion certificate. Mears issued an injunction against the Employer’s Agent to prevent it from certifying practical completion, arguing that the reduction of more than 3% in the size of the 56 student rooms was expressly stipulated in the Agreement to be a material breach. If practical completion could not be properly certified, then Mears was entitled to terminate the agreement.
Decision
Breach of contract
The Court of Appeal (upholding the first instance decision of the Technology & Construction Court) did not agree with Mears that the breach of the 3% tolerance level was expressly stipulated to be a material breach of the contract in the Agreement.
The Court held that whilst the Agreement deemed Clause 6.2.1 material, it did not necessarily follow that Clause 6.2.1 was a ‘material term’. What Mears had actually done was to establish what would be considered a breach under the Agreement – it had not established that a breach of the tolerance level was a material breach of the Agreement.
As the Court noted, if Clause 6.2.1 was interpreted as a material term then it would lead to the very uncommercial result that any failure to meet the 3% tolerance, no matter how trivial, would allow Mears to determine the Agreement. In the view of Coulson LJ, “clear words would be necessary for such a draconian result and there was no such wording in Clause 6.2.1”.
As the first instance judge had set out in his judgment, labelling something as ‘material’ does not say anything “about the extent or importance of that breach to the Property or works as a whole”. In essence, a “material variation” did not necessarily amount to a “material breach” of the contract.
As Mears had not established that Clause 6.2.1 was a material term (and there was nothing stopping it having done this in the original drafting), the question on whether the practical completion certificate could be issued turned on the Employer’s Agent’s interpretation of whether practical completion had been reached.
Practical completion
The Court held that where there is an absence of any express definition of practical completion in the Agreement, it is up to the certifier to determine whether practical completion has been reached. The existence of a patent defect, that is the reduction in the size of the student rooms, does not prevent the certification of practical completion if the defect is considered by an employer’s agent to be “trifling”, which presumably the Employer’s Agent did in this case. The fact that the breaches were economically irredeemable was considered to be irrelevant.
In reaching its decision, the Court of Appeal provided a helpful summary on the law pertaining to practical completion:
- Practical completion is easier to recognise than it is to define.
- The existence of a latent defect should not prevent practical completion, as by its very nature such a defect is not known at the time of practical completion.
- Where there is a patent defect, there is no difference between an item of work that has yet to be completed and an item of defective work which requires to be remedied.
- The existence of a patent defect does not prevent practical completion, where the defect can be shown to be trifling.
- Whether or not an item is trifling is a question of fact and degree, to be measured against “the purpose of allowing the employer to take possession of the works and to use them as intended”.
- The fact that a defect is irremediable does not support the proposition that the works were not practically complete.
Comment
On a proper construction of Clause 6.2.1 it is difficult to argue with the conclusion reached by the Court of Appeal – Mears had not established that there was a breach to a material term and therefore could not prevent the practical completion certificate being issued so as to allow them to terminate the Agreement.
The decision does, however, have implications for a purchaser seeking to determine a contract where there have been unilateral material variations to the plans. The purchaser may not be able to terminate unless it has expressly stipulated that a material variation is a termination event. This is easier said than done, as it is not possible to anticipate every possible material variation and a seller will unlikely agree to a contract being terminated on every deviation from the agreed specification (which would be commercially unworkable).
In the absence of an express contractual right to terminate or a contractual definition of practical completion, then determining if practical completion has been achieved is a question for the certifier, to be ascertained as a matter of fact and degree. Whilst the Court’s decision in Mears sets out helpful guidance on this, – as highlighted by Coulson LJ, practical completion is easier to recognise than define.
To avoid reliance on the certifier, our advice to developers is to work with their solicitor at the outset to establish the important aspects of a development and then ensure that they build them into the contract as material terms.
This article is for general purpose and guidance only and does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered. No part of this article may be used, reproduced, stored or transmitted in any form, or by any means without the prior permission of Brecher LLP.
