Case study – construction law issues with a refit of a commercial retail part of building

The background

The Client - contractor client to be engaged by its Employer to repurpose a former large department store unit within a town centre location.  

The Property - large, empty, and obsolete retail space occupying several floors that has become unsuitable for modern retail demands.

Commercial Objective for the Scheme - transform the space into smaller, more marketable, and lettable retail units suitable for modern commercial tenants such as food service and specialty retailers.  Ultimately, attracting quality commercial tenants on long-term leases, generating sustainable rental income.

Project Structure - planned a two-phase development approach:

• Phase 1 - strip-out works to remove all internal fixtures and fittings, returning the unit to bare shell condition

• Phase 2 - design and construction of subdivided retail units with modern MEP installations for multi-tenant occupancy

Legal and Commercial Issues We Identified

·       Inappropriate Contract Selection – the developer’s team issued a sizeable Design & Build contract, with extensive amendments, for the first phase of works. This created problems for our client.  The strip-out works involved no design, thereby making design liability clauses, professional indemnity insurance provisions, and collateral warranty requirements largely irrelevant.  The approach was complex.

·       Understanding and planning for expectations – the developer will likely insist that future commercial tenants receive collateral warranties from our client and its subcontracting team.  Without proper planning, working alongside our client, this could create delays or require costly post-completion warranty negotiations with the sub-contracting team.

·       Cost and Timing Implications - mismatch between contract complexity and the works threatened to increase legal costs unnecessarily, while creating potential for disputes over contractual provisions.

How We Resolved Our Client’s Needs

·       Contract Restructuring for Strip-Out Phase - we advised replacing the Design & Build contract with a more proportionate instrument - specifically a JCT Minor Works Contract or bespoke simple building contract more tailored to this phase of works i.e., a more basic performance standard for strip out works.

·       Risk-Appropriate Documentation – we sought to eliminated irrelevant provisions (design liability and professional indemnity requirements) that served no purpose for strip-out works, creating a streamlined contract that accurately reflected the risk profile.

·       Future-Proofing Strategy for Main Works - for the subsequent construction phase, we will advise our client on the contents of the main building contract.  This will likely include the expected warranty obligations, requiring our contractor client and its key subcontractors to provide collateral warranties to new tenants.  As part of this we will negotiate and finalise collateral warranty templates, which will be annexed to the building contract.

·       Template Integration - we will work with our client to ‘step down’ the agreed collateral warranty templates onto its sub-contracting team.  This will ensure there is consistency in warranty terms and eliminate the need for case-by-case negotiations, which could cause delay or create commercial uncertainty.