25 / 06 / 2019
Who said, “Buy land, they’re not making it anymore”? Answer at the end of the piece, for those whose memories fail them… What “they” are making seems to be different types of land to lure in investors. In the past one could buy residential, office or retail land. Today logistics, retirement living, leisure, hotels, private rented sector and student accommodation are all developing as asset classes in their own right.
Investors and their professional advisers need to be alive to the potential opportunities, yet alert to risks specific to each new asset class. This point is brought out very clearly by the recent case of Mears Ltd v Costplan Services (South East) Limited  EWCA Civ 502 which dealt with the construction of some new-build student accommodation.
The accommodation was to be built in accordance with plans and specifications attached to the contract, all statutory consents and a building contract in JCT form, which is a standard suite of forms widely used in the UK. As is common practice in contracts for new buildings, any material changes to the works required the buyer’s consent, and the contract defined a change in the size of rooms by more than 3% as “material”. On practical completion under the building contract, the buyer/investor was due to make the final payment and took ownership of the land with the new accommodation on it. Unfortunately at the practical completion inspection it was discovered that 50 of the student bedrooms and some other rooms were too small – not in accordance with the dimensions shown in the attachments to the contract. This was a material change to the works made without consent. The size of student bedrooms has a direct impact on the income that can be achieved from them. The buyer claimed that the material change to the building contract without their consent was a material breach of the contract, and that the buyer was not obliged to complete the purchase.
The parties had this claim considered by the court as an expedited trial of limited issues. Limited issues have the potential to reduce the cost of litigation and to speed up hearings when one point is agreed to be fundamental to the case. However in this case the judge felt that a material change without consent wasn’t necessarily a material breach of contract. For example, if a bin store had fallen outside the 3% tolerance range, that would have been a material change but couldn’t possibly be so serious that the buyer could end the whole contract. The buyer has other remedies, such as suing for damages and making a claim under the warranties it has from the building contractor and other professionals involved, though it’s not clear what they will do at this stage.
For a lawyer, a limited issues hearing raises as many questions as it provides answers. Why wasn’t the room discrepancy spotted earlier or communicated correctly? Did the buyer have a project monitor at site inspections and meetings? The right project monitor can be invaluable for investors and their advisors, providing on-site presence and technical expertise. Although there’s a cost involved, we’d recommend an independent monitor – the temptation to double up and “share” a lender’s project monitor should be resisted.
This case turns on practical completion, which is notoriously difficult to define. But there are other perils for the investor in student accommodation as well, such as making sure a new build block can be marketed and completed at the relevant stages of the academic year, which starts in September in the UK. Each of the new asset classes has its own quirks and peculiarities.
The risks in new asset classes need to be balanced against the potential rewards, as with any asset class or investment opportunity. I’ll end with another Mark Twain quote, “The man with a new idea is a crank until the idea succeeds.”
- Each new asset class comes with its own unique set of risks
- In this case the material unapproved change to the works was not a material breach of the contract
- There is no legal definition of practical completion
- A trial of limited issues can reduce costs and expedite the hearing
- The cost of an independent project monitor and their technical expertise is likely to be money well spent