Loss Prevention Alerts

Alert 25 - Onerous terms in English Partnerships' collateral warranties

This loss prevention alert has been produced by the Loss Prevention Working Group (LPWG) of the AGS. It highlights issues that the LPWG considers may be of relevance to members. It is not intended to provide a definitive response to any issues and before taking action members should consider carefully whether they need to seek independent legal advice.

A meeting has been held with representatives of English Partnerships to discuss their contract. Of special concern is a particularly worrying term in the contract relating to collateral warranties. It seems that some AGS members are agreeing to contract on English Partnerships' terms but it is important at least to understand the risks and ramifications.

The English Partnerships' contract contains a provision requiring the consultant to issue collateral warranties to a range of parties as follows:

"At the request of the Client from time to time … the Consultant shall at their own expense execute as deeds and deliver to the Client within 14 days of any such request one or more deeds of warranty in the form set out at Schedule [ ] with such amendments as the Client may reasonably require in favour of a party or parties … providing finance, taking a lease or purchasing or intending to purchase the site."

It is the words marked in bold which are a concern. What is reasonable from English Partnerships' perspective may not be reasonable from the consultant's. For example, what is to stop English Partnerships' designating that fitness for purpose obligations should be incorporated into the collateral warranty, arguing that these are reasonable as they are what their counterparty requires of them, and then asking the consultant to execute such amended warranties. It should be noted that under the contract English Partnerships have a power of attorney in the event that the consultant fails to comply with its obligations and this clearly includes the ability to execute, on the consultant's behalf, collateral warranties with such amendments incorporated into them.

There may be those who wonder whether an ability to make reasonable amendments would be regarded by the courts as too uncertain to be given contractual effect. Unfortunately such a contention may not work as the clause allows English Partnerships to determine what is reasonable. Accordingly, any uncertainty is overcome by the exercise of discretion on the part of one of the parties.

English Partnerships' view is that given the nature of the gap funding they provide, and the fact that future dealings with the site may involve a very wide range of undertaking such as developers, house builders, funders and insurance companies, it is important that they have flexibility. They argue that if these parties want collateral warranties different to those set out in the schedule to the term contract the entire transaction may fail unless the consultant can be persuaded to execute a different form of collateral warranty to that agreed, which of course is entirely at the consultant's discretion.

This ignores the fact that there are collateral warranties, published by the British Property Federation, which are generally regarded as acceptable to developers provided the provisions relating to limitations on liability are deleted. BPF warranties have been produced for purchasers, tenants and funders, and those taking interests in sites from English Partnerships ought to be content with these.

The ability that English Partnerships have reserved for themselves to amend the agreed form of warranty creates more problems than it solves. Those taking interests from English Partnerships, knowing that English Partnerships have such a power, will no doubt insist that English Partnerships use it to augment the contractual warranty protection provided to them to the detriment of the consultant. One would expect English Partnerships, being a public sector undertaking, to engage in appropriate procurement and contracting procedures. There is a risk that other employers of consultants will adopt English Partnerships' methods for dealing with collateral warranties, arguing that these have now become market practice.

At the very least, those proposing to contract with English Partnerships should object to this highly dangerous provision.

Prepared for the Members of the AGS by Steven Francis, DLA

Date of Issue: 8 April 2003