Oxgangs primary school was the first school to be closed following the collapse of a wall during Storm Gertrude. It has been reported that this was due to missing ties used to support building walls. This led to a survey, and subsequent closure, of 16 more schools which were built and run as part of the same PFI initiative, by Miller Construction (now Galliford Try).
This type of construction defect is one which appears to fall into the basket of L&I defects which we commercial property lawyers often find ourselves considering in the context of new leases.
Is the defect latent or patent?
Broadly speaking a latent defect is one which cannot be discovered on an inspection of the premises, which is caused by the defective design or construction of a newly constructed (or heavily refurbished) building.
By their nature, such defects only become apparent when something subsequently goes wrong with the building (such as high winds blowing off parts of the external wall revealing that the necessary wall ties were not used).
Other examples include using defective cladding or roofing which leads to water ingress or defective materials being used in structural pillars or beams which degrade dangerously over time.
L&I defects can therefore be contrasted with patent defects which ought to be discoverable from a survey of the building.
There is, however, no fixed legal definition of what constitutes L&I defects - so it is prudent to define the type of defects intended to be covered when apportioning liability for them in a deed (for example defective design, workmanship, materials, supervision or installation).
Tenant's Repairing Obligation
The likelihood of problems manifesting from L&I defects should decrease in line with the age of the building (as the older the building, the more likely that any such defects will have already made themselves apparent).
If a tenant is taking a lease as first tenant of the whole of a new build with a full repairing liability (with no exclusion of L&I defects) then that tenant can reasonably expect to receive a full package of construction warranties from the contractor and the professional team.
If L&I defects are subsequently revealed, which fall within tenant's repairing covenant, then the tenant would have a right of recourse against the relevant party (presuming they haven't gone bust and that their insurance is adequate).
If a tenant will not get the benefit of such warranties (perhaps because the property is multi-let and the landlord does not therefore have rights to procure warranties to be granted to all of the tenants) then the tenant might seek to carve out the repair and reinstatement of L&I defects from its (otherwise full) repairing obligation and push the responsibility for such works on to the landlord. This is the safest course for a tenant.
If so, a tenant will also want to place positive obligations on its landlord to carry out such works at the landlord's cost and exclude recovery of such cost from any service charge (if the landlord's obligations extend to the common parts).
This might be acceptable to a landlord who is not in position to grant a construction package to a tenant but does have sufficient rights of recourse itself from the contractor and professional team.
However, such a carve out would probably adversely affect the investment value of the asset (by the dilution of the tenant's repairing obligations) so is likely to be fought against hard by the landlord.
It is worth noting that under common law in Scotland fixing L&I defects is not a tenant's responsibility, as it falls under the umbrella of extraordinary repairs - but a full repairing lease obligation will ordinarily displace that obligation from the landlord on to the tenant. A careful examination of the repairing obligation is essential to understand whether or not that is the case. If it includes obligations to repair, renew, rebuild, reinstate and/or replace (irrespective of the cause of damage) then the remediation of latent inherent defects will fall to the tenant.
L&I Defects Insurance
If a landlord does accept a carve out of L&I defects in the lease then it could choose to protect itself using L&I defects insurance. (Equally, if a tenant cannot negotiate a carve out it may choose to do the same). Such insurance is not cheap though, so is likely to be resisted by a landlord / developer if it's not been included in its construction budget.
Usually the ballpark figure the premium for a 10 year policy is around 1% of the reinstatement value (not market value) but it could be higher or lower dependant on the nature of the property, and more importantly, the type of build. A straightforward shed is going to be cheaper than a multi storey office block with complex design/architectural features.
The best (ie lowest) premiums are obtained if cover is agreed before any work starts on site - as the insurer is then able to audit the quality of the build from the foundations upwards. Cover can be placed on completed properties, but as the inaccessible areas cannot be inspected, there is a higher cost in view of the increased risk to the insurer. Most often, the reason for insurance cover being requested on a completed property is because it is being sold and the original warranties are found to be worthless due e.g. to contractor insolvency. The cover on these would be for the balance of 10 years from completion, and not a full 10 years from the date when insurance is obtained.
Most landlords / developers tend to rely on their construction package unless they think there is a good reason to incur the additional outlay.
Interestingly, in contrast to Scotland, it is compulsory to take out such cover for new builds in some countries (such as France and Egypt) for a period of 10 years following practical completion.
Address the issue…
By their very nature L&I defects are unknown beasts at the date of entry and the cost of remedying them over the period of a lease is unquantifiable at the outset.
To avoid any nasty surprises in relation to new or recent builds (or buildings that have been subject to major refurbishments) it is key that both landlords and tenants understand their obligations up front and - where possible - shelter themselves from exposure to open ended cost whether within the lease, construction package or via insurance.