How to manage the top 5 property risks Stephen Morris, Partner, Acuity

How to manage the top 5
property risks
12th June 2014
Stephen Morris, Partner, Acuity
Graham Waller, Account Executive, Willis
The shield of insurance
Parties covered – owner, landlord, tenant, lender(s), other
interested parties, successors in title
Period of title insurance policy usually perpetuity. Other
insurances are either annual or limited term
60% of paid claim usually legal costs/ investigation fees
Requires no material previous approach to affected party
Benefits to insured of taking out a
Transfers financial risk
Peace of mind
Quicker than legal negotiations
Competitive premiums
Managing the top 5 property risks
A right of light claim during development
Title and search risks and liability arising as part of due diligence
Designation of land as common land/village green
Contaminated Land
Ineffective procurement in construction of development
Right of light claims
 When and how do they arise?
 What effect do they have on development – the risk of injunction?
Shelfer v City of London Electric Lighting Co (1895)
Regan v Paul Properties DPF No 1 Ltd (2007)
HKRUK II (CHC) Limited v Heaney (2010)
Coventry v Lawrence (2014)
Right of light claims continued/…
 How can a developer remove or reduce its risk?
o Negotiate settlement
o Issue light obstruction notice
o Section 237 Town and Country Planning Act 1990; or
o Insurance
 Availability of insurance and nature of cover
 Requirements of insurer and disclosure of policy
Title and search risks
 Developer’s options
Withdraw from the transaction
Ignore defects/covenant
Engage lawyers and advisors to resolve the defect/covenant
Transfer the risk to an insurer
Absence of Easements
Inferior Title
Rent Charges
Lack of Access
Defective Leases
Reservation of Rights
Adverse Possession
Lack of Planning
Chancel Repair
Forfeiture of Lease
Lost Deeds
Mines and Minerals
Restrictive Covenants
Rights of Light
Judicial Review
Designation as common
land/village green
 Effect of designation as common land or town or village green
 Registration as tactic to thwart development
o Section 15 of Common Act 2006
o Lewis v Redcar (2010)
 Redressing the balance - Growth and Infrastructure Act 2013
(England only)
o Reduction of grace period
o Landowner statements
o Trigger events
 Draft Wales Planning Act
Contaminated Land
 Clean up liability – purchasers, developers, tenants
 “Further action” desktop survey
 Steps to assess/manage liability
Commission full environmental survey
Apportion liability
Insurance policy
Construction Risks
12th June 2014
James Williams, Partner, Acuity
Mike Carolan, Construction Practice, Willis
Design and Build Procurement
Main Contractor
Consultants (only to
prepare the “Employers
Other Consultants
Two Stage Procurement
• Two separate stages distinct from normal
• Early contractor
- Input into design
- Costs
- Buildability
- Programme
• Early order of materials
Two Stage Procurement
Stage 1
Stage 2
Pre-construction Phase
Construction Phase
Pre-construction activities on the basis of an agreed pre-construction timetable and
for an agreed pre-construction price
Engagement of
the Contractor
and the Design
and preparation
Design development
by the consultants
with input from the
Layered build-up
of prices with
Agree terms of the building
contract, consultancy
agreements, Employer’s
Requirements, the
Contractor’s Proposals and
other documents
Achieve final price
within the client’s
project budget. If
not, re-tender on
the open market.
Sign the building
contract , Novate
commence the works
How can this reduce risks?
• The Contractor is better
• The price is more certain
• The timeframe is more
• Risks have been identified
and dealt with prior to
Owner Coordinated Insurance
In the last 20 years nearly all major construction projects have
been protected by project specific insurance programmes
Financiers have fuelled this trend by taking a greater interest in the
cost & scope of insurance in order to protect their investments
The benefits of an OCIP also apply to small and medium sized
By arranging an OCIP the contractual risks remain with the
contractors but some insurance responsibility may change
Important that OCIP considered at early stage prior to going out to
tender for maximum benefit
Owner Coordinated Insurance –
 Address key material damage, liability and financial
 Provides control, certainty, flexibility and ultimately
peace of mind to parties
 Ease of transfer to operational insurance programme
 Competitive premium rates
 Meet Financiers requirements
• Insurance costs directly borne by developer – will the
contractor discount his insurance price to account for
Owner Coordinated Insurance –
• Contract works
• Existing structures
• Additional costs of working
• Increased costs of constructing incomplete & unbuilt
• Public Liability
• Non negligence - JCT 2011 Clause 6.5.1
• Advanced loss of income/delay in start up
Owner Coordinated Insurance
Advanced Loss of Income
Very important element of an OCIP
 Provides cover for Advance Loss of Rent, Profit, Interest
etc arising out of damage to the Works (under the
policy) which causes delay to Practical Completion
 Such cover only provided in conjunction with same
insurers covering the contract works
 Does NOT replace contractors LAD’s
 The Employer will not receive LAD’s for delay, where an
extension in time is given following loss by Specified
Owner Coordinated Insurance
Insolvency of Contractors
First priority is to get project back on track
If OCIP in place
 Cover Continues
 Keep insurers advised
 Re-tender project
If insurances via the insolvent
x Contractor insurances cease
x Immediate replacement
insurances required
x Additional increased
insurance costs
Tenant Fit Out – The Issues
• Landlord refusal to waive subrogation against tenant
contractors – Why?
• Mismatch in Public Liability requirements
• Landlord requirements vs contractor purchase – the
• Contract insurance clauses – comply or amend?
But when….
Case Study – Fit Out
 A tenant in a £100M office building in Bishopsgate, London
appointed a contractor to undertake £1M fit of out of floor 12.
In the tender process JCT Clause 6.7C was used
The tenant asked the Building Owner the week before works
started for their Contractor to be included in the Buildings
insurance policy. The Owner said no.
The works started and the JCT contract remained unchanged
A fire in the works damaged the Existing Building. The buildings
insurers paid the claim and sought recovery from the negligent
The fit out contractor sued the tenant for the losses claimed by the
Owner’s insurers, as the tenant had failed to comply with contract.
Surety - Bonds
12th June 2014
Sally Webb, Willis
What is a Bond?
A bond supports a company’s contractual obligations providing financial
protection to the project owner or authority against loss from breach of contract or
default by the contracting party under the arrangement.
i.e. The bond covers the damages suffered
by the customer or another interested party
in the event of non performance of a contract
A contract bond is a tripartite agreement
in favour of one………..The Beneficiary!
On Demand Bond – What is it and What
are the Risks?
An independent banking obligation requiring the Guarantor to pay up to the full
amount stated in the bond ‘on demand’ by the Employer
A bond of this type will generally be in short form and expressed to become
payable ‘on demand’
Payment must normally be made notwithstanding protests by the contracting
party and without any requirement on the part of the Employer to prove a
breach of contract or that any damages have actually been suffered
The contracting party has no defence against a call on such a bond other than
proven fraud
Have been used as a ‘lever’ by employers when a contractual dispute has
An improper call on the bond could jeopardise the solvency of the
contracting party
Even an Employer owing money to the contracting party can still
make a demand for payment
It is an obligation wholly independent of the contract
If the bond is called neither the contracting party or provider of the
bond can give any contractual defence
The effects of providing such bonds is to deprive the contracting party
of the benefit of all safeguards built into the contract
It is not a guarantee, therefore the liability of the bank is not coextensive with the liability of the contracting party under the
underlying contract
ABI Model Form of Bond
The ABI Model Form of Guarantee Bond was published on the 22nd September
1995 with only a few minor cosmetic amendments made since.
The wording was published following a lengthy period of consultation with
government and local authority advisers, commercial users, construction and
engineering bodies and Insurers.
There were criticisms of archaic bond wordings made by the House of Lords and
this was highlighted in the Trafalgar House v General & Surety (1994)
Aims of the ABI Model Form
The aim of the ABI is to produce a model form of bond which:
• Is in short form
• In clear, modern language
• Operates as a guarantee of payment on contractor default and not merely on demand
• Provides the employer with an entitlement to damages immediately at the point where
the contracting party becomes liable to pay damages under the contract
• Minimises the risk of litigation
• Contains a clear expiry date
• Introduce one industry standard model form of guarantee bond which provides clarity
and purpose and equity to the employer, contractor and surety
• Cut out the many different bond wordings on use and save all parties time and legal
costs associated with the issue of bonds
Underwriting Considerations
Surety bonds are underwritten as an extension of credit and are written on recourse terms.
When underwriting bonds, the Surety considers what is known as the “four C’s”:
The Details……..
The bond should contain a limit on the aggregate financial exposure. If an
Advanced Payment Bond there should be a reduction in the financial exposure in
proportion to the value of goods delivered or services performed
For NEC bonded contracts, ensure that either the amended ABI Model wording for
use with NEC contracts is used or the following NEC Rider clause is inserted:
"PROVIDED FURTHER THAT notwithstanding any provision of the Contract by
which, following termination of the Contractor's obligation to provide the Works,
the Contractor might be required to make payment in respect of "Damages" on the
basis of an estimate, forecast or assessment of the Project Manager or other
agent of the Employer under the Contract, the Guarantor shall not be required to
make payment under this Guarantee Bond until such time as the Works have
been completed and the actual "Damages" have been properly established and
ascertained, the liability of the Guarantor under this Guarantee Bond shall be coextensive with the liability of the Contractor under the Contract".