The following blog post has been written up by Sarah Fox, a friend of Prosperity Network’s and the author of “How to Write Simple and Effective Small Works Contracts in Just 500 Words”. She has presented on our weekly Zoom calls and she has sat down to film more content for our community. Both those videos are on the portal for Prosperity Network members to watch over. Thank you for taking time to write this and for contributing to our community in such a positive way, Sarah!
Over to Sarah:
It is far better to learn hard lessons from someone else’s mistakes. This guest post from Sarah Fox, Author of How to Write Simple and Effective Small Works Contracts in Just 500 Words sets out the lessons we can learn from a property development project which went unpleasantly wrong. She also signposts where you can get more information or help from her book.
A family group asked a friend to find them someone to refurbish and extend a bungalow to be used by multiple families – just like a house in multiple occupation but with the added layer of complexity that comes from mixing business with relatives!
The builder’s quotation for about £56,000 of work was briefly summarised in writing and treated as a contract. Although not discussed in the court proceedings, this document clearly had enough certainty (chapter 3) to be a building contract. However, it did not name the parties. It wasn’t clear to the builder who the actual client was, and the builder believed the friend (who acted as the owners’ agent) was paying.
TIP 1: Always check who is involved in the project and name them in your contract clearly.
This contract was later varied to include over £60,000 of additional work – but neither the agent nor the builder could not agree when the varied contract was finalised nor the precise scope of the revised works. There was a brief attempt to use the JCT Home Owner contract which the builder refused to sign. [Note: this contract is only suitable for owners who are not in business, it does not suit property developers.]
TIP 2: don’t just record the initial agreement in writing to avoid disputes (chapter 6), ensure all changes are properly instructed and recorded in writing (chapter 14).
As well as being unclear as to the parties and scope, the varied contract did not record what payments would be made by the owner to fund the works. The first contract had provided for weekly payments of £4,000. The builder argued it was going to be paid the same amount throughout the project, whereas the owners thought they were going to pay roughly £3,000 per week, depending on the progress.
TIP 3: ensure both parties know exactly what the payment terms are (use my Happiness Check at chapter 23).
In a rather underhand manner, the owners only prepared a proper written version of the varied contract when they realised that they might have to sue their builder. They tried to persuade the builder to sign it on the basis that it would the suspended works to continue. The court said that the owners had misled the builder and drafted it to include more onerous requirements than those that had been orally agreed. That’s a judicial slap on the wrist for the owners and its agent!
TIP 4: your conduct throughout a project will come under scrutiny if you end up in court.
After 6 months of work, the project stopped. The builder claimed that as the owners had run out of funds it would stop work and resume when funds were available. The owners claimed that the builder had abandoned the project and it had stopped paying due to slow progress and defects. The court disagreed with the owners and decided they were in breach of the contract, awarding the builder its lost profits, at a 20% margin, on the works it was not allowed to complete.
After the final totting up and accounting for monies paid, the builder was awarded nearly £20,000 in unpaid works and lost profits, as well as it costs of the proceedings.
TIP 5: take advice before ending a contract as mistakes will prove costly (chapter 19)
On a lighter note, the owners also complained that “that the Property was left like a building site”. The judge said he found “that complaint odd, since the Property was in fact a building site and, if the [owners] were expecting work to continue, they would be expecting the Property to be a building site”!!
Many of the small projects that end before the courts are this sort of catalogue of poor contract process, poor project management and poor communication between the owners and their builder. With a little planning, your contracts can support your projects rather than undermine them. If you need help with creating simple effective contracts that safeguard your property development business without annoying your builders, get in touch.
Sarah Fox, 500 Words Ltd