During development projects or building improvements, some of the work might reach completion and be ready to use before others. Owners are understandably anxious to monetize their investment as soon as possible, giving rise to the issue of early occupancy.
The fundamental issue of early occupancy is straight-forward.
As Jeff Scorgie and Michael Swartz of WeirFoulds LLP outline, both the CCDC 2-2020 Stipulated Price Contract and the updated CCA 1-2021 version, “allow the owner to take early occupancy of part of the work on certain conditions, one of which includes obtaining the contractor’s agreement. Both contracts also stipulate that the one-year warranty period on the part of the work (or subcontract work) being occupied will start to run from that date.”
It’s important to understand the finer details.
“Early occupancy by an owner may only occur with the agreement of the contractor as well as the approval of the relevant authorities having jurisdiction,” Edward Lynde, partner with Fasken Martineau DuMoulin LLP told the Daily Commercial News. He explained this concept flows down through to the subcontractors.
“The subcontractors (must) expressly acknowledge that an owner may take occupancy of part, or the entirety, of the work, which is subject to agreement between the owner and contractor. However, pursuant to SCC 12.2.2, prior to any agreement between the owner and contractor, the contractor must consult and obtain the agreement of the subcontractor.”
On the other hand, specific sections of both the CCDC-2 2020 and CCA-1, “expressly state that such agreement must not be unreasonably withheld,” he said. “It would be a fascinating fact scenario and determination by the court as to what is considered to be the reasonable or unreasonable withholding of the agreement in the event that a scenario arises where certain parties, including in particular an owner, wishes to take early occupancy, and other parties withhold its agreement (i.e. contractor or subcontractor).”
It leaves the question open as to what constitutes “reasonable or unreasonable” in this context, a topic Lynde feels the construction and infrastructure industry might wish to consider.
Sahil Shoor, partner at Gowling WLG, told the Daily Commercial News the recent inclusion of early occupancy into the CCDC contracts leaves a gap in current legal understanding.
“Case law has yet to catch up to help illustrate how courts will interpret the ambiguities of the clause.”
He pointed out, however, that the early occupancy does not relieve the contractor from the requirement to complete the work.
“The early occupancy clause only operates to commence the warranty period and to relieve the contractor from being liable for any area that becomes occupied by the owner. Without greater clarity from the courts, it is clear that early occupancy may lead to lengthy disputes regarding warranties and liabilities”
Warranties for window systems, elevators, HVACs and electrical elements could carry varying expiry dates. Health and safety obligations would need to be addressed if construction continues around occupied areas of the project.
Both Lynde and Shoor feel potential overlaps in warranties and liabilities need to be considered.
“Parties must think about all of the potential issues, including legal, financial, practical, and otherwise, prior to agreeing to early occupancy,” Lynde said. “As a common theme in construction and infrastructure law, the parties should take the time to discuss and memorialize clear and unambiguous terms and conditions setting out their respective rights and obligations in the context of early occupancy.”
“It may also be prudent for the parties to undertake additional services for deficiency review of the portions of the project that will be occupied early and the administration of warranties for such portions,” said Shoor. “The more an occupied portion contains building systems or components transcending boundaries, the more prudent it would be to supplement the early occupancy clause with supplementary conditions detailing warranty trigger dates, extension of liabilities, ongoing work requirements, lien impacts, and so on.”
Early occupancy and “substantial performance” could have potential overlaps. These will be discussed next time.
John Bleasby is a Coldwater, Ont.-based freelance writer. Send comments and Legal Notes column ideas to email@example.com.