Some agreements for lease will need to comply with the Construction Contracts Act. Robert Rooney, Construction Partner, looks at when this might arise, and what landlords and tenants should consider when it does.
The Construction Contracts Act (CCA) was enacted almost ten years ago and applies to new construction contracts entered into after July 2016. However, a point which can still occasionally surprise tenants and landlords alike is the application of the CCA to agreements for lease (AFLs). The CCA can introduce additional obligations into AFLs.
Are AFLs subject to the CCA?
The CCA applies to agreements where one party agrees to execute or arrange for the execution of “construction operations”. The term “construction operations” is broadly defined. It includes construction, repair and maintenance. It also includes typical fitout activity such as provision of heat, light and air conditioning as well as communication systems.
Where an AFL includes an obligation on one of the parties to undertake construction operations for the other, the AFL will be subject to the CCA. A typical example is a landlord agreeing to design or execute tenant fitout. However, examples may be more subtle. It can sometimes be agreed that a landlord will omit electrical works, for example, but that the tenant will execute those works as part of its works. That would also engage the CCA.
What happens if an AFL is subject to the CCA?
The CCA makes two main interventions into a construction contract. Firstly, it ensures the AFL has a payment mechanism which determines the dates and amounts of payments. Although the CCA might appear to leave discretion as to the period between interim payments to the parties to the AFL, other provisions in the CCA mean that many parties will agree to interim payments for works under an AFL to be processed every 30 days.
Secondly, it introduces a dispute resolution mechanism – adjudication – which is a quicker method of resolving disputes. The process, from initiation to payment, can take as little as eight weeks or less. Adjudication provides for a temporarily binding decision, so an aggrieved party can bring the same dispute to court or arbitration. However, in the meantime, if the adjudicator has ordered payment, that payment must be made. This is sometimes called a ‘pay now, argue later’ approach.
Spotting the signs of an adjudication
A key issue for landlords and tenants in AFLs where differences or disputes are arising is noticing the signs of an imminent adjudication.
Typically, before an adjudication commences, a party will issue a more formal payment claim notice, which may contrast in style and content with the previous interim payment applications. Similarly, a party may start to notice references to the CCA in correspondence. All of this should be considered as signs of potential adjudication. The receiving party will need to both consider whether an adjudication might be averted by negotiation or otherwise, and to simultaneously prepare for receiving a notice of intention to refer to adjudication.
Implications for landlords and tenants
Landlords and tenants will need to consider whether their AFLs are subject to the CCA. If they are, then they will also need to consider:
- Whether the payment mechanism for works complies with the CCA
- Whether the dispute mechanisms under the AFL interact efficiently with adjudication – for example, it may be that any requirement for mediation is set aside if a party initiates an adjudication
For more information on the Construction Contracts Act and Agreements for Lease, please contact a member of our Construction, Infrastructure & Utilities team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.