What is a Collateral Warranty?

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The question ‘what is a collateral warranty?’ may draw blank looks even among real estate professionals. Collateral warranties are duties of care owed by a building contractor and/or any member or company of the professional team (e.g. architects, surveyors, planning consultants, M&E consultants, contractors, civil engineers, project managers) to the developer/ landowner which are then passed onto a buyer, tenant, or lender. A commercial property solicitor should be able to advise on this, but we have also explained the basic principles below.

Rights of Third Parties in Developments etc.

Before the Contracts (Rights of Third Parties) Act 1999, these duties of care would not automatically be passed onto buyers and tenants etc. unless a collateral warrantee was entered into. Since the passing of the new act, unless that act is expressly excluded in the building contract or Terms of Appointment with the contractor or professional, an express collateral warranty is no longer needed. However, some buyers (and tenants etc.) might consider that the insurance cover effected by the contractor or professional is too low, and then a collateral warrantee would be required to provide for an increased limit.

Step In Rights

what is collateral warrantyIf a lender has lent a sum of money to developer, and developer goes bust, the lender will want rights to step into the shoes of the developer, with rights to negotiate and treat with the contractor and the professional team. The 1999 legislation does not make this a right, but they can do this if a collateral warranty has already been entered into with the professional team. This could end up both allowing the project to continue to the advantage of the lender who recoups his investment, but also the contractors and professionals who will be able to rely on the lender to fulfill the original investor’s obligations.