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Developers’ 10-Year Responsibility: How to Safeguard Developers & Owners from the Risks Arising from Structural Defects

Structural defects in a building are one of the worst risks for real estate developers and owners. One structural defect can put their years of credibility and brand image at risk. Above all, it can jeopardize the safety and lives of the residents. Most structural defects start with poor construction or design. As once rightly said by famous American Author, Lt. Gordon Bitner Hinckley ‘You can’t build a great building on a weak foundation. You must have a solid foundation if you’re going to have a strong superstructure.’ The usage of faulty materials, unscientific building practices, and lack of quality control are some of the reasons for the weak foundation of the building. 

It is of paramount importance for the developers to lay special emphasis on the structure and design of the building and conduct all required audits to overcome the potential structural defect. Some of the most common structural defects which can arise due to bad construction include -cracks & water seepage from the water table. These common structural defects due to bad construction can significantly bring down the value of the property, adversely impacts its occupancy rate, dents the brand image, and leads to hefty lawsuits for the developers.

How Developers Can Avoid the Structural Defects in the Building?

Some of the tips to mitigate the risk of structural defects include –

  • Working with professional designers and contractors in the building. 
  • Paying special emphasis on third-party audits during construction on high-risk factors such as waterproofing can be a good risk mitigation strategy.
  • Conducting timely audits and inspections of the building at different stages during and after the construction. A well-planned design & construction phase can avoid the vast majority of structural defects in the building and ensure that the quality of materials is not compromised throughout the construction process. 
  • Managing warranties of both main contractors and all subcontractors, especially waterproofing contractors.
  • Managing insurance for the developer, main contractor, consultant, and all subcontractors

What is 10-year Structural Warranty?

A 10-year Structural Warranty commonly referred to as Decennial Liability is imposed upon contractors, architects, and engineers as per the UAE law.  As per the UAE Civil Code, the designers, architects, engineers, and contractors are jointly liable to compensate for any total or partial collapse of the building and any defect which affects the safety and stability of the building’s structure.

Articles 880 to 883 of the UAE Civil Transactions Law govern ‘decennial liability’ and provides rights to employers/developers/ purchasers against contractor/constructor / engineer/architect for the total or partial collapse of a building or any defects found in the building which threaten the stability or safety of the building. Where the architect does not supervise the construction of the property but merely designs the building, they can only be held liable for design defects. 

  • I. Article 880 (1) states that a contractor and a supervising architect (which may mean a supervising engineer if the context permits) are collectively liable to pay the employer for a term of ten years from the start of delivery of the work, provided that the building suffers
  • (a) a total or (b) a partial collapse or (c) a defect or fault which threatens the stability and safety of the building.
  • II. Article 880 (2) states that the remedy given to the employer is in the form of compensation, which is an obligation notwithstanding the fact that the defect or collapse results from a defect in the land itself, or else the employer has consented to the construction of the defective buildings or installations. 
  • V. Article 882 mentions that a supervising architect or contractor cannot contract out of decennial liability or limit his liability. This is a matter of strict liability, and no evidence of negligence is necessary. Instead, they can only refuse liability on the grounds of force majeure, or they can attempt to argue that the defect is due to an underlying reason, likely due to the actions of the employer or a third party in relation to the building.
  • Article 882 of the UAE Civil Transactions Law provides that such liability ranges for a period of 10 years, and cannot be subcontracted or lessened by means of a contract. For the right holders, it is important to raise a claim within three years of the collapse of the building or the discovery of a threatening defect.

Article (40) in Law 6, 2019 ‘Liability of Developers’, states – 

  1. Subject to the provisions governing contractor agreements, as stipulated in the above-mentioned Federal Law No. (5) of 1985, a developer will remain liable, for a period of ten (10) years from the date of obtaining the completion certificate of the Real Property project developed by him, to remedy or rectify any defects in the structural parts of the Jointly Owned Real Property.
  1. The Developer will remain liable, for a period of one (1) year from the date of handover of the Unit to the Owner, for repairing or replacing defective installations in the Jointly Owned Real Property. These include mechanical and electrical works, sanitary and sewerage installations, and similar installations. Where an Owner refrains from taking possession of his Unit for any reason, the above-mentioned liability period will commence from the date of obtaining the completion certificate of the Real Property project developed by the Developer.
  1. Subject to the provisions of paragraphs (a) and (b) of this Article, nothing in this Law may preclude or prejudice any rights or warranties granted to Owners as against Developers pursuant to any other legislation.
  2. An agreement which is made after this Law comes into force and which contradicts, in any way, the provisions of this Article will be deemed null and void.

An Urge for the Developers to embrace 10-year Structural Warranty Insurance 

Building construction projects come with a variety of risks for real estate developers. Mostly, contractors, architects, and engineers manage their risk on building and construction projects through insurance. For instance, architects sign up for a professional indemnity policy to cover any negligence in their design.

The contractor signs up for insurance to cover risks related to property damage or third-party injuries, and also insurance covers professional liability due to poor workmanship during construction. Such insurance should cover a period of 10 years for the project, post handover, to cover for the 10-year structural responsibility and liability.  Thus, it is of paramount importance to ensure that the insurance amount is sufficient to cover a major portion of the building value and not a minor percentage. It is also prudent to obtain a list of pending insurance claims and the history of insurance premiums, beneficiaries, and claims from contractors and consultants. We find a lot of developers making the mistake of accepting low insurance coverage that covers only a minor percentage. Similarly, performance guarantees should be sufficient to cover major structural defects and should consider a portion for the 10-year period.

Being key stakeholders, real estate developers must ensure they must be covered for all uncertainties which can arise during the construction process. It is of utmost importance for the developers to consult with their legal counsel and insurance experts to ensure protection for the developer and the customers. Signing up for a 10-year Structural Warranty Insurance can cover the developer from all major risks pertaining to structural defects.

Key Factors to Consider for Developers While Reviewing Insurance 

A.) Insurance

While signing a construction contract with the contractor, developers must ensure the following points are met –

1. Insurance Policy Must Name the Developer as ‘Beneficiary’

While hiring a contractor for the project, the developers must ensure that they receive a 10-year insurance policy from the contractor. The policy must have the developer named as a beneficiary to cover for any structural defects which may arise during the 10 years of liability as per civil law and Law No. (6) of 2019 Concerning Ownership of Jointly Owned Real Property in the Emirate of Dubai. It is crucial to remember that decennial liability can extend for 13 years from building completion if, for example, the defects were detected within a short period of time before the completion of the 10-year decennial liability.

2. Timely Payment of Insurance Premiums 

It is pivotal for the developers to ensure that the premiums for all the insurance policies including those of the main contractor, subcontractor, and consultants are paid on time, and to maintain a log of evidence. We recommend hiring an insurance broker with a mandate to ensure the insurance policies of all consultants, contractors, and subcontractors remain valid during the 10-year duration. Some developers also enforce the contractors to work with the developer’s insurance broker to ensure that the policies are all in order, have the right coverage and remain valid by the developer’s insurance broker. 

3. Ensure Insurance Policy Remains Valid 

Developers must make sure that the insurance coverage always remains valid during the 10 years. 

4. Maintain the Records of the Communication 

Developers must maintain a record of all the correspondence and communication that happened with the contractor. They must also document the communication that happened between the contractor, consultant, and authorities throughout the design and construction stage. This will ensure the developer has the evidence required in case of issues or disputes in the future.

In a case that Kaizen was involved in, it was the communication records between the contractor and the consultant that gave proof of the root cause of a structural defect, and held the relevant party responsible, freeing the developer from the liabilities. 

Factors to consider for developers While Reviewing Warranties

B.) Warranties

1.) Must Name the Developer as ‘Beneficiary’

After the construction, the Subcontractors issue the warranties to the main contractor. Developers must ensure that they are named as the beneficiary of these warranties. This is immensely important as it allows developers to utilize these warranties from the subcontractor in case the contractor goes out of business or declares bankruptcy.

2.) Developers Must Maintain the Validity of the Warranties in writing with the Consultant and Contractor 

Deducting final payments from contractors may also deem the warranty null and void unless contractually agreed. Developers must always maintain the validity of the warranties in writing with the consultant and contractor at each milestone and especially towards the closing of the project and especially if there are final deductions of payments. 

3.) Must Ensure Contractors Make Timely Payments to Subcontractors

The developer must ensure the contractor has made all the payments to the sub-contractors. This will ensure warranties don’t become null and void which may happen when final payments are not made. The developers need to maintain records of the payments of the main contractor to the sub-contractors to avoid any discrepancy in the later stage.

Key Factors to Consider for Developers Post Handover

1.) Notifying Defects to the Contractors & Subcontractors 

Developers must notify and report any defect in the property to the Contractors & Subcontractors throughout the 10-year decennial liability period. It is also of great importance for the developers to conduct a third-party structural assessment every 2 years from the BCC date and a final one 6 months before the expiry of the 10-year warranty (which starts from the BCC date). This will ensure that all the issues are timely reported to the contractors and consultants and claims are made in due time before the completion of the 10 years. Claims that are not made within 3 years of detecting the defect can affect your legal stand to the claim.

2.) Consult with the Main contractor and the Consultant before Conducting Repairs

Developers must avoid conducting any repair work during or after the takeover without the pre-approval, and supervision, of both the main contractor and consultant. This way, they will be able to avoid being involved in cases that may deem the warranties void. 

3.)  Share Relevant Information with the Management Company

The developers need to share any past or ongoing construction issues with the project or the one which needs close monitoring with the management company. This will allow the property managers in laying special emphasis on the areas which require close monitoring and taking necessary action.

Developers must also maintain an ongoing relationship with the management company. Although management companies are not responsible for detecting structural defects, however, they can assist the developer throughout the 10-year warranty period.