Just as the construction industry dips into another recession, the global financial crash of 2008 may be back to haunt landlords and occupiers who moved into new premises 10 years ago.
As warranty agreements taken out during or shortly after the financial crash now start to expire, some occupiers and landlords are facing long lists of repairs including structural defects, failing roof finishes, faulty cladding fixtures and defective windows, as a direct consequence of the decisions forced upon developers and contractors who were in the midst of construction during the crash.
The concern is that more will experience this situation over the next couple of years.
The shockwaves of 2007 and 2008 hit the UK property industry hard. Schemes that were in the course of construction were subject to sudden cost re-evaluations to keep the developments viable. It was a period of upheaval. Staff retention was low; project teams regularly changed – it was not uncommon for project teams to change across the life-cycle of a project. The end result was lower quality buildings.
And now, 10 years on, as the warranty agreements started during the crash come to an end, property management companies (PMCs), landlords and occupiers across the residential and commercial sectors are finding themselves faced with expensive repair bills. And as a consequence, many are now having to argue with warranty providers over who will pick up the costs.
It is not uncommon for PMCs, landlords or occupiers to let their warranty agreements lapse without instructing pre-lapse surveys, and this is often why combat with tenants and warranty providers ensues.
The purpose of a warranty
agreement is to remove risk from the PMC, landlord or occupier and place it in the hands of a third party; but when the agreement expires without a concluding survey of the building defects, the risk is placed back on the PMC, landlord or occupier.
Warranty providers will likely have the resource capacity, more so than tenants, to take the disagreement to the courts, and therefore, it is up to the PMC or landlord to take the battle to their own tenant.
Preparing for expiring warranties
For those PMCs, landlords and occupiers whose warranty agreements have expired, the responsible party for the repair costs will have already been acknowledged, but there is still leeway for those who are approaching their final year of warranty.
If a warranty is coming to an end, the simplest way to remove risk is to carry out a pre-lapse survey before the warranty agreement expires. Independent surveys will identify all building defects and acknowledge the ones that are covered against the warranty agreement. It will be a lot easier to claim the repair costs from a warranty provider with the right documents, than it will be to, for example, increase tenants’ fees to cover the costs, which will instigate lengthy and expensive battles.
The warranty process can be complicated. However, the most commonly overlooked issue of expiry dates is also perhaps the most easily addressed.
Landlords, PMCs and occupiers need to utilise their warranty agreements and claim for the works they can, while they can.
Occupiers can also work with landlords in the process by raising any concerns or building defects as they occur, rather than waiting until the end of the tenancy. This gives landlords and PMCs sufficient time to ascertain if they are covered under the warranty agreement and make the appropriate claims.
Planning for the future
And now, as the construction industry slips into another recession, the viability question is front of mind for developers again. So, what should PMCs, landlords and occupiers do to prevent a recurrence of warranty disagreements in 10 years’ time?
When moving into a new building or taking the first lease on a property, they should utilise the defects rectification period. Often overlooked, this typically lasts between six and 12 months.
It places the responsibility for repairs needed in the initial occupying stages of a new building onto the contractor.
PMCs, landlords and occupiers should take advantage of this period and instruct a planned preventative maintenance (PPM) survey at the start of a lease to identify any structural or cosmetic issues that may have a negative impact on the property in the short-term and long-term occupation of a building.
If the faults are likely to appear in the next six to 12 months, then they should be claimed on the defects rectifications and the warranty agreement remains untouched.
Should the PPM suggest potential defects further down the lease, then the PMC, landlord or occupier has enough time to establish if they can be claimed on the warranty agreement. If they cannot, then the repair costs can be incorporated accurately into the maintenance cost forecast.
As talk of a new recession is back on the industry agenda, many PMCs, landlords and occupiers are experiencing delayed side effects from the previous one.
But for those whose warranties are coming to an end, there is still time to act in order to minimise risk, and for
those considering new leases and warranties, there are opportunities to learn from the past. PMCs, landlords
and occupiers have a variety of mechanisms at their disposal that are designed to transfer risk – but they are only effective if used on time.
Ben Walker is a director at CS2 chartered surveyors
