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What are Collateral Warranties?

View profile for Jamie Parsons
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Collateral warranties are a common requirement when undertaking a construction project that requires funding, or, will be sold or rented upon completion.

What do they do?

The legal answer is that they put a third party (with an interest in the site i.e. Funder, Purchaser or Tenant) into a contractual position to rely upon both:

  • the professional services provided in relation to the project; and

  • the construction of the project by the Main Contractor.

What does this mean in practice?

The rights to the beneficiary of the collateral warranty will normally include:

  • A warranty that they have complied with their appointment within the build contract or sub-contract. 

  • Rights to use information created under their appointment; such as design work. 

  • The right to step into the contract or appointment if the contracting party fails to meet their obligations (this normally is the result of say a company going insolvent and not paying a party, such as the Architect). 

    • This means that rather than having to run the risk that the professional may increase their fee – the beneficiary can just ‘step into the shoes’ of the original contracting party and ensure the project can be completed with the existing team and at the existing fee.

  • Benefit of the Professional Indemnity insurance of the professional and that such provision is for (normally) 12 years from practical completion.

    • The advantage is that the beneficiary has a direct link to the professional so that should there be a claim, they do not need to pass through the seller for example or rely upon any tortious action.

  • Ability to assign the benefit of the Collateral Warranty to another third party.

    • This is beneficial if the project is sold on and the beneficiary has the right to pass on the benefit of the Collateral Warranty without the need to expressly seek permission from the provider of the Collateral Warranty.

What points should you consider about Collateral Warranties?

We would suggest that it can save time and money, if you can seek to provide the terms and requirements (i.e. PI level) of the Collateral Warranty at an early stage to both the Professional Team and within the tender documentation.

We can provide advice on what terms should be acceptable to funders to limit further negotiation on these if the funder is not known from the outset (which is often the position).

Secondly in respect to the Build Contract. if the terms are included within the tender documentation this greatly reduces the possibility of the Contractor seeking to charge more for such provisions; especially if you are down to just two possible contractors or indeed, whilst finalising the Build Contract with the preferred contractor.

There are as ever further aspects that need to be considered such as the ‘net contribution clause’ – but I will save that for another time!

If you do have queries or matters where you feel I could assist, feel free to drop me an email or give me a call on 07957 626 042.

Author: Jamie Parsons

22 January 2021