Can you assign part of the benefit of a collateral warranty?

slice of pieThe problem:
In some cases, a construction project intended to be sold as a single unit is ultimately divided into one or more parts. Upon the sale of such a part, how does one deal with collateral warranties originally granted in respect of the entire site?

 

The question:

Can a purchaser take a legal assignment of only part of a collateral warranty?

The likely answer...

This will depend upon the terms of the warranty in question.

If the underlying building contract or consultant appointment (and any associated warranties) are based on industry standard forms and/or reflect the market norm, it would be unusual for assignment of part of the warranty to be permitted.

Possible solutions?

Ask for a new collateral warranty...

In such cases, the purchaser of part of a site might ask the original warrantor for a new collateral warranty in its favour. This is unlikely to be forthcoming unless there is some financial or commercial benefit to the warrantor.

Ask for the existing warranty to be held on trust...

An alternative, would be to ask the holder of the existing collateral warranty to hold it on trust for the purchaser and enforce its terms in the purchaser’s name should any defects arise in the purchaser's part of the development. Any agreement of this nature would need to be documented in a deed.

Prevention is the best medicine...

If there is any suggestion at the start of a project that the completed development may be split and later sold or let in parts, it would be advisable to:

  • obtain separate collateral warranties in respect of the relevant parts of the works, or
  • address the possibility of assignment of part of the benefit of the warranty in the building contract/consultant appointment and form of collateral warranty.

Don't miss our free checklist (available from the free downloads area):
Reviewing a Funder Collateral Warranty

Collateral Funder Warranty Checklist (Downloads page)

This checklist sets out the key issues to consider when reviewing a collateral warranty on behalf of a funder. The term ‘funder’ is used throughout to refer to any party that is providing finance in connection with a project. Download your copy here.

Filed Under: Construction

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