Clause and effect of poor building work: Lords rule that former owners can sue contractors

NEGOTIATIONS to buy a house that has had any sort of building work done to it may never be the same after two recent rulings in the House of Lords.

Clued-up purchasers could insist that they will not buy a property unless there is a clause in the contract stating that the seller will take legal action against the builder if a problem with the work arises after any guarantee has lapsed.

John Samson, property partner with solicitors Nabarro Nathanson, said: 'There could be a major new element in the way we negotiate the purchase of a property. The results of the cases could have widespread consequences - affecting not just houses with major building works but everything from conservatories to double glazing.'

In the first case, the original owner of a property in central London entered into three consecutive contracts with different builders to remove asbestos. The owner issued legal proceedings against the first two builders because they did not do the job in accordance with the terms of the contract.

The owner then sold the property. The sale agreement contained an assignment clause which was intended to transfer to the purchaser all the owner's rights against the builders.

The purchaser paid the full price for the property on the basis that he would eventually recover from the builders any costs incurred in getting rid of the asbestos.

The purchaser then tried to sue the builders but failed. The assignment clause was ineffective. The building contracts had provided that they could not be assigned without the consent of the builders and consent was not given.

In the second case faulty work required pounds 800,000-worth of remedial action. The original owner had assigned the building contract, again without the consent of the builder.

This time both the original and the new owners jointly sued the contractors for damages to recover the cost of the work.

The House of Lords again ruled that the assignment without consent was invalid. The new owners could not sue. The only person who could sue was the original owner.

Mr Samson said: 'The general rule is that when you sue the damages you can recover are limited to the amount of your loss. If you have sold the property for the full price you will not have made any loss.

'So you have the situation where a builder is in breach of a contract for thousands of pounds, the original owner cannot sue because he has not suffered any loss and the purchaser cannot sue as there has been no valid assignment of the contract. Thankfully the House of Lords has said that building contracts can be an exception to the general rule.

'The courts will now be able to allow the original owner to claim the full damages from the builder. Buyers need to make special arrangements with sellers to force them to sue and to ensure the damages are passed over.'

If you are buying a house which, for example, has had an extension, the seller cannot pass over to you the common- law right to sue the builder or the architect for defective work or defective design.

But now you can effectively obtain these rights by insisting that the seller puts a clause in the contract that if a problem arises, the seller will sue on behalf of the purchaser and hand over any damages recovered.

Realistically, sellers will worry about giving an undertaking to sue. If the case goes against them they could end up being liable not only for their own costs but also the builder's.

'It would be perfectly reasonable for the buyer to agree to indemnify the seller for his costs,' Mr Samson said.

'However, this still leaves outstanding the vexed question of protecting the seller should the buyer fail to pay the costs. The seller should ideally require some form of security.'

If there is a guarantee in force for the work which covers the problem, then you should rely on that. The extra protection to sue builders applies only where there are no guarantees.

Guarantees are usually easily transferred. But if the builder is insolvent a guarantee may not be worth anything unless it comes from a third party such as the National House Building Council. And remember, sueing is only worthwhile if the builder has money.