Businesses should ensure they check the small print in all their contracts and understand all the terms and conditions, or they could be putting their organisation at serious financial risk, warns Adams & Remers.

David Platt, Partner at Adams & Remers comments: “In my experience it isn’t uncommon to come across clients that are carrying out building work to or even building a new premises without sufficient, or in the worst case no, building contract in place.”

A recent case David was involved with should serve as a warning to all businesses to ensure that if you have a contract in place, the terms of the contract are understood fully before it is signed.

David Platt said: “I was recently instructed by a care home owner who was building a substantial annex to an existing care home, funded by over £300k bank lending. The client’s bank had agreed the terms of the loan and the client duly signed the paperwork. The client then instructed a builder, an architect and a structural engineer and signed a standard form of building contract produced by the builder and appointed the architect and engineer.”

“Unfortunately the client had not fully read or understood all the terms of the financing agreement with his bank, which contained a fairly standard clause that is usually seen in construction finance agreements. This required the borrower to get the bank’s solicitors to approve the contracts with the builder, architect and structural engineer and for each of them to provide the bank with written warranties certifying the quality of their work before any monies were released by the bank.”

“The business owner found himself in a very difficult position, as the builder had already submitted the first of several staged payment invoices for work carried out in the first month, but the bank was refusing to hand over any monies until a new building contract and proper written terms of appointment of the consultants had been approved by its solicitors and signed, along with approved written warranties from the builder and consultants.”

“The builder would at this stage have been well within its rights to have halted the job and taken legal action against the care home owner to recover the monies owed and damages. He might have been entitled to walk away from the building contract altogether if the client didn’t pay up quickly. The client wasn’t in a position to pay for any of the building work without the bank’s funding and a large gap was left in the side of the care home as well as its bank account.”

“The situation resolved when, after some considerable negotiation, a new building contract was entered into in a form which the builder was prepared to sign, and which the bank’s solicitors ultimately approved and which included provision for the builder to give the bank the required warranties. The bank then reluctantly agreed to release the first payment to the builder.”

“However, it took a few more weeks to get the architect and structural engineer to agree and sign the written terms of their new appointments which also had to be approved by the bank’s solicitors, by the architect’s and the engineer’s solicitors and by the architect’s and the engineer’s professional indemnity insurers. It was only after that further protracted period of negotiation that the bank finally agreed to lend any further finance to pay the builder and the consultants.”

David sums up “Luckily for the business owner the situation was satisfactorily resolved for all parties and the project continued and was funded without further complications but others who may find themselves in a similar position may not be so fortunate.”

“To unwittingly put your business at risk is certainly something that most owners would not willingly do, so it is essential to ensure that you fully understand all your legal responsibilities and follow the terms of the contract accordingly.

“Firstly, if you are seeking funding for a project, discuss the terms of the loan with your solicitor to ensure you fully understand your responsibilities. Also ensure that any contracts with builders and other professionals meets the requirements of the lenders as well as your own requirements and don’t be tempted to start the project until this is in place.”

“Whilst many owners will be tempted to keep the costs of building work to a minimum, it may be a wise investment to appoint a project manager to oversee the building work and to ensure the terms of the contract are observed. It may just be well worth the investment to free up your time to concentrate on other areas of your business in the knowledge that the work will continue without exposing you to financial loss or litigation.”

David Platt concludes: “Finally, never be afraid to query contractual terms and to ask questions at any stage of the process, but preferably before any contracts have been signed.”

For further information contact the Adams & Remers Commercial Property Team.