When acquiring a commercial project what does the Owner/Developer as Purchaser (Purchaser) need to obtain from the Seller to be fully protected from post-acquisition design or construction defects? Many Purchasers believe it is only necessary to take assignment of the construction warranties (if any) provided in the construction agreement between the Contractor and the Seller.
This is a mistake.
In addition to taking assignment of all construction warranties as part of the Purchase and Sale Agreement (PSA), the Purchaser should also take assignment of (1) the construction agreement itself, along with all claims arising thereunder, and (2) all other agreements entered into between the Seller and third parties providing design, engineering or construction services for the Project, along with all claims arising from those agreements. In so doing, a Purchaser ensures that it will be in a proper position to bring claims against any necessary party should a post-acquisition design or construction defect arise during the applicable statutes of limitation or repose.
Why is taking assignment of the underlying agreements and claims arising from those agreements necessary; can’t a Purchaser simply rely on any non-expired construction warranties and/or just sue the parties which caused the defects?
The answer is typically no, for two reasons.
First, most construction warranties only run for one year following Substantial Completion of the Project and only require the Contractor to repair defective work. Depending on when the property is acquired, the warranties may no longer be in effect, and even if they are, such warranties will not allow the Owner/Purchaser to recover economic losses (such as lost revenue or income) incurred as a result of any defect.
Second, the majority of states abide by what is known as the “Economic Loss Doctrine.” The net effect of this rule is that a subsequent Purchaser of a Project, in most instances, cannot sue the parties who designed and/or built it for economic losses resulting from defective design or construction, unless the Purchaser has a direct contractual relationship with such parties via an assignment of the underlying contract.
But is simply taking assignment of the existing agreements and claims enough?
Only if the agreements were well drafted to protect the Owner, which may not always be the case. It is important to read each of the various agreements carefully and determine if the Owner’s post-completion rights and remedies have been preserved and not waived or limited. If not, the Purchaser can either: (1) ask the Seller to attempt to amend the problematic provisions in the underlying agreements (which may be difficult due to the lack of leverage following completion of the Project), or failing that, (2) require the Seller to indemnify the Purchaser in the PSA from the consequences of the poorly drafted design or construction agreement.
Morris, Manning & Martin’s Construction Law Practice Group is experienced in representing Owners, Developers, and Purchasers of commercial properties. If you need any assistance in the process of negotiating the assignment or amendment of Construction, Design, or Engineering Agreements as part of a PSA, please contact Bruce Smith, chair of MMM’s Construction Law Practice Group, Colby Nelson, or JD Howard.
