Practical completion is an elastic concept generally understood as marking the point at which the works under a building contract are complete, save for minor defects, and the client can take possession or occupation of the building.
It is an important landmark during the lifecycle of a construction project as practical completion triggers, amongst other things, the start of the defects liability and maintenance periods, final payment to the contractor and payment of the retention. This is also the stage when the employer becomes responsible for the insurance and general maintenance of the building.
Interpretation of practical completion
Despite its significance and implications, practical completion is not normally a term which is defined in standard form building contracts and there are no precise factors establishing exactly when this milestone is achieved in all construction projects. As such, it is often at the discretion of the employer's agent/contract administrator or architect to certify practical completion. As the Court of Appeal indicated in the case of Mears v Costplan Services (South East) Ltd [2019] EWCA Civ 502, practical completion may be "easier to recognise than define" and courts may adopt a more flexible and pragmatic approach where the notion is not defined.
The inherent flexibility in the concept of practical completion serves a purpose in catering for different clients and different types of projects which may have varying standards in terms of what practical completion should entail. A commercial developer in a busy development market is likely to be more lenient in its approach to accepting practical completion, and a contractor will be keen for practical completion to be certified as soon as possible to pass responsibility over to the developer. In these circumstances, disagreements over what practical completion constitutes may be less likely. On the other hand, in an agreement for lease, a tenant of a commercial unit, for instance, who is not yet prepared to commence fit-out works, open for trading or start paying rent will be more meticulous in its approach. Similarly, a Registered Provider who is to subsequently rent out its properties to housing association tenants and who may also be under an obligation to comply with provisions relating to practical completion in its funding agreement, is likely to adopt a stricter approach in ensuring that all requirements are met before practical completion is certified.
It is in situations where parties' interests do not align or where parties are trying to avoid the consequences of achieving this milestone that the lack of a strict test or specific procedures to determine practical completion can give rise to disputes as to whether it has occurred. This is particularly the case where the building contract is silent on this point.
Parties should always consider amending standard form building contracts to define practical completion.
It is not only building contracts that refer to practical completion: it is often a key event under a development agreement or an agreement for lease.
For Registered Providers, in particular, practical completion under these documents will usually mean, as a condition precedent, compliance with a very detailed list of handover requirements.
The definitions of practical completion in the building contract and the development documents may not match, and it is common to see practical completion achieved under the building contract, where the definition may be looser or non-existent, and not under the development agreement, where the definition is very lengthy and specific.
This may lead to disputes, as the developer will be caught between one test for practical completion under the building contract, which will trigger financial consequences such as the release of part of the retention, and another, more onerous test for practical completion under the development agreement, which will trigger the completion of the development transaction and the Registered Provider taking possession.
Care should always be taken to differentiate between the practical completion requirements of the particular documents in a development project.
Ideally, there should be one, consistent standard for establishing practical completion across the development and construction documents, but where this is not the case it is important to establish what the different tests for practical completion might be, the different obligations that will be imposed on the parties and the consequences under each separate contract.
Building Safety Act implications for practical completion
Another layer of complexity is added to the process of certifying practical completion by the "gateway" system of building control for higher-risk buildings (that is, buildings with at least two residential units which are at least 18 metres in height or have at least seven storeys) introduced by the Building Safety Act 2022.
Under the gateway regime, higher-risk buildings must be approved by the Health and Safety Executive, as Building Safety Regulator, at three stages of the project, known as gateways: firstly, at the planning application stage (gateway one), secondly, before the commencement of construction works (gateway two) and finally, before occupation of the building (gateway three).
The employer under the building contract is now required to obtain a construction completion certificate from the Building Safety Regulator before the building can be occupied. The Regulator has an eight week period within which to determine a valid application.
Gateway three will need to be factored in to building contacts and development documents, and how they define practical completion, and we suggest that parties should take care to define practical completion and also to set out how gateway three will affect practical completion. It may be appropriate, for example, to specify that practical completion should not be granted until the completion certificate has been issued.
Practical completion is already fertile source of disputes and the Building Safety Act has introduced a new set of issues for litigation. Careful consideration of the issues and the drafting will ensure that your contract does not set a new legal precedent.
