Commercial & Retail Fitouts. How you could find yourself out of business before you even begin.
The tips in this article are intended for business owners planning to fit out commercial or retail premises and Landlords of premises leased to such businesses.
Briefly, the relevance for the Landlord is simply that:
- if their Tenant gets caught out they may become insolvent and unable to pay rent before the Lease even begins, or
- if the Landlord is to be responsible for the fit out works (or any part) they are then also susceptible to being caught out.
What am I talking about? The Building & Construction Industry Security of Payment Act 1999 (‘the Security of Payment Act‘).
Unless you carry on business in the building industry you have probably never heard of it. Even builders and suppliers, who are aware of the name, often struggle to appreciate its potential impact and significance.
Unlike the Home Building Act, its not there to protect unfamiliar contracting parties from risks associated with poor building workmanship or questionable practices.
The Security of Payment Act exists to ensure that builders and contractors can recover payments quickly. It does this by:
- prohibiting recipients of progress claims (including one off or final claims) from withholding payment on the basis of any reason that was not raised with the builder in writing at the first instance and within the allowed time, and
- creating a scheme for the independent adjudication of progress claims that are disputed within the allowed time.
Significantly, if an unsuspecting recipient of a progress claim does not set out reasons for withholding payment strictly within the allowed time, the builder or contractor is entitled to recover payment of the amount claimed and may obtain a Judgment through the Courts, if necessary. Where Court action is necessary the party is prohibited from raising any Defence under the contract or Cross Claim in the proceedings. Essentially, this means that they must pay the amount claimed (despite the dispute) and then sue the builder to recover any over payment or damages that will result.
The Security of Payment Act applies to virtually all commercial building projects, from small commercial or retail fit outs to large commercial or residential projects. If the construction contract is not for residential building work where one of the parties will be the occupier of the finished dwelling, it is safe to assume the Security of Payment Act will apply.
Whilst most developers and large construction companies are familiar with these laws, and often have designated employees responsible for managing progress claims to avoid the bite of the Security of Payment Act, businesses fitting out commercial or retail premises and developers of smaller projects are often vulnerable simply because of a lack of awareness of the Security of Payment Act and the massive punch that it can deliver.
I recently acted for some business owners who had purchased their own commercial premises and entered into a contract with a commercial fitout builder to undertake fitout works worth about $900,000. They were in dispute with the builder over a progress claim for approximately $215,000 and the project was only about 60% complete.
The business owners initially sought legal advice from a lawyer who was not familiar with the Security of Payment Act. Whilst there was genuine grounds for disputing the amount claimed due to a number of major defects and the builder’s failures to obtain a Construction Certificate from Council necessary for them to lawfully commence the work in the first place, the business owners failed to provide a Payment Schedule (a written reply setting out reasons for withholding payment) within the allowed time.
When the builder’s lawyer wrote asserting an indisputable right to payment of $215,000 under the Security of Payment Act, the client understandably freaked out at the prospect of having to pay $215,000 for work that they considered was worthless. The lawyer originally instructed, seeing a potential case in professional negligence against them, also ceased acting, leaving the business owners proverbially up to their neck in it.
Had the builder’s contract been better drafted the business owners would have had no choice but to pay the $215,000 and to bring a claim in damages against the builder in connection with the unauthorised and defective work. This would have crippled the business and likely sent the company into liquidation as both the costs of the rectification work and potential costs of litigation were significant.
Thankfully I was able to identify a flaw in the builder’s contract that undermined the validity of their progress claim as a Payment Claim under the Security of Payment Act. This meant that, in this instance, the consequences of failing to provide a Payment Schedule within the allowed time could be avoided and the business could not be forced to pay the $215,000 despite the major problems with the works.
In this case, the business owners dodged a bullet, but often businesses are not so lucky.
The lesson is this
If you are planning on signing a contract for any commercial building work, get advice from a Building & Construction Lawyer familiar with the Security of Payment Act. Make sure you clearly understand when the builder may make a claim for a progress payment, what you need to include in a Payment Schedule and the unforgiving time frames that you have to give them. Then administer the contract carefully ensuring that detailed Payment Schedules are given if and when necessary.
Regardless of how well you know the builder, or who has recommended them, if a dispute arises, a builder properly advised will not hesitate to take advantage of the Security of Payment Act to recover payment from you fast and in full. If you can’t afford the payment, because you would then be unable to complete the build or would be left without adequate working capital to effectively launch your business or new office, you could find yourself out of business before you have even begun.
In 2012 I published a plain English Guide to the Security of Payment Act. Whilst this Guide is written primarily for contractors and suppliers, its summary of the key concepts and operation of the Security of Payment Act would be useful for anyone considering a commercial fitout or small to medium development. Click here to download a copy.
If you would like to speak to me about any existing plans or contracts you are negotiating, I would be pleased to hear from you.
I can also assist with ensuring that the contracts that you make adequately protect you from other common risks including in relation to; delays, variations and exclusions or even prepare a suitable and clear construction contract for the project if the contract proposed by the builder is lacking.