Property Legal: Fit for purpose

Property LegalScott Lambert

The hotel and retail industry is competitive and operators need to carefully protect their marketing name and brand. Accordingly, hotel and retail fit outs need to reflect the image that the operator or brand has cultivated over time.

In this region it is unusual for operators to actually own the hotels/outlets that they operate and it is typical for operators to enter operation agreements with the owner or local agent (“owner”), which require the owner to fit out the hotel or outlet in accordance with the operator’s requirements (often set out in a technical services agreement).

Unless fit out works are properly procured, difficulties will be encountered in enforcing rights if the fit out works are defective. This is unsatisfactory for both the owner and the operator whose interests converge and this note briefly considers some of the key issues to be addressed in fit out contracts from the perspective of the owner and the operator.

Procurement – It is usually best for the owner to go through a tender to determine the most competitive offer for the works. When tendering it is important to prequalify the contractors to be asked to tender and only have 3 to 5 tenderers to ensure that keen interest among those tendering. It may be beneficial to engage a contractor who has previously successfully done work for the hotel operator.

Timing - Allowing sufficient time for the development of the design and obtaining approvals is vital for a project to run smoothly. If forward commitments are made without sufficient allowance for delays, there is a recipe for dispute or additional acceleration costs. Ensure that the responsibility for obtaining approvals, whether local authority or hotel operator, is clear, possibly through the use of a matrix annexed to the contract.

Back to back – It is important that the fit out contract is ‘back to back’ with the owner’s obligations under the operator agreement. Failure to do so may expose the owner to liability.

Design – Design agreements should include a design review process (i.e. to ensure compliance with the operator’s specifications) as well as a ‘fitness for purpose’ warranty. All design obligations should be backstopped by professional indemnity insurance.

Construction - Once the design is sufficiently advanced, construction works can begin. It is important that the contractor complies with ‘best industry practice’ and the operator’s specifications.

Payment – Lump sum pricing is recommended for certainty of price. To incentivize performance, ‘backloaded’ milestone related payment structures should be used.

Variations – It is vital for the owner to have the express right to instruct variations under a clear mechanism which allows for the price to be quickly and easily determined.

Working in an operating environment - Where the project is to take place in a building or centre where there are ongoing business operations (whether due to mixing with other contractors on site, a hotel that is continuing to trade or a shop where the mall is still operating) provisions need to be included in the contract to ensure proper coordination and associated risks are managed.

Timely completion – Fixed times for completion are imperative as this is when revenues can be generated. Delay damages should apply for late completion, which should mirror any delay damages under the operator agreement and also possibly include estimated lost revenue or rental expenses. Bonuses may be payable if the works are completed early where business can commence on completion of the project. A cap on delay damages (customarily about 10 per cent of the contract sum) may also be used with a right to terminate once the cap is exceeded.

Taking Over and Defects - The contract should clearly set out the standards that the works are required to attain (i.e. satisfying the operator’s requirements) in order for them to be taken over. Defects will compromise the appearance and functionality of a fit out and can tarnish a brand. It is therefore vital that they are remedied by the contractor when directed by the owner.

Performance security – This is important to ensure that the owner has readily available redress against the contractor (including if defects are not remedied). On demand performance bonds should be required plus retentions should be deducted from each payment. This will also provide more incentive for the contractor to complete on time and remedy any defects in the works.

Termination - A fit out contract should be subject to customary rights of termination as well as if the operator agreement is terminated. Any applicable local law formalities regarding termination should be properly addressed in the drafting.

Key Point

Many of these tips are applicable to any fit out project. You risk delay, cost and dispute if you simply go ahead with the “standard” contract. There is no standard fit out so each project needs to consider its circumstances and requirements and ensure the procurement and documents are adjusted to suit.

The main tip is that if you follow a considered procurement procedure and ensure your documents are carefully drafted and up to date with the law, your prospects of the project going to a costly and expensive dispute are significantly reduced.

Source: Scott Lambert is Regional Head of Construction and Infrastructure at Al Tamimi &
Company, Special to Property WeeklyPW

Al Nisr Publishing accepts no liability for the views or opinions expressed in this column, or for the consequences of any actions taken on the basis of the information provided

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