RESOURCES | Must a collateral warranty be executed by the beneficiary in order to be enforceable?
Collateral warranties remain a key document in the construction suite of documents, writes Ruth Carins of Hill Dickinson. They are normally required when building works are carried out, or sought when existing recent developments are let, sold on or refinanced.
The time and effort involved in pulling together all the collateral warranties can be a considerable and therefore expensive task. When executing collateral warranties, the standard practice is to ensure that every party to the collateral warranty executes, regardless of whether the collateral warranty is bipartite or tripartite.
However, there is an argument that a beneficiary (such as a purchaser, tenant or funder) technically does not need to execute the collateral warranty in order for it to be valid. This is something that we see being requested more often, although not yet regularly.
Subject to the following conditions being met, it may be possible for a collateral warranty not to have to be executed by the beneficiary:
- The beneficiary is not assuming any obligations under the collateral warranty (such as step-in rights)
- The collateral warranty would need to be executed by the other parties as a deed and not simply as an agreement
- The beneficiary is clearly identified within the collateral warranty
- The collateral warranty does not contain a condition requiring execution by the beneficiary (including the removal of any execution block for the beneficiary)
- It is not a condition of the warrantor executing that the beneficiary is also a signatory
This can only apply to collateral warranties where the beneficiary is not assuming obligations and therefore any collateral warranties containing step-in clauses or similar provisions will need to be executed, as is standard practice, by all parties.
There may be occasions when it is not convenient to have the beneficiary execute the deed. For example, a beneficiary who is outside the UK. In those circumstances, care should be taken that conditions 1-5 above are met. You ought not to put a signature block on the document – otherwise it might look that you simply forgot to have the Beneficiary execute.
We still recommend that if there is ever any doubt, standard practice should be exercised and all parties, including the Beneficiary, should execute to ensure validity. This is the understood practise and is likely to avoid unnecessary confusion when it comes to any future transaction of which the warranty is part of the suite of construction documents offered to a new landlord, tenant or funder.
The technical bit
The exception can be made for beneficiaries who are not assuming obligations because deeds can broadly be categorised either as “deed polls” or “deeds inter partes”.
A deed poll is made either by a single party expressing the intention of that party or by several parties to convey their common intention; whereas a deed inter partes (a deed made between two or more parties) includes promises and obligations between the parties, to each other, and is intended to evidence the agreement of such promises and obligations.
Generally speaking, deeds inter partes are only enforceable by the parties to the deed. In relation to deed polls, however, the common law position is that the deed can generally be enforced by a third party in whose favour the deed has been executed (regardless of whether the third party has executed the deed), provided that the third party has been clearly and sufficiently identified within the deed as a beneficiary.
Therefore, provided the collateral warranty constitutes a deed poll and the intended beneficiary is clearly identified, then the need for the beneficiary to execute falls away.
This article was originally published through Place Resources