What is a Collateral Warranty and Do I Need One?

As the cranes return and Ireland’s construction industry gets back on it’s feet, everyone is dusting off hard hats and getting ready for a new flow of construction funding.  With the damage done to construction professionals and contractors over the last 8 years, we can expect initial projects to be tightly controlled and finance to be closely monitored.

When undertaking a construction project of any scale, you are likely to be faced with a list of important construction documents:

  • Building Agreement
  • Appointments of Professionals
  • Professional Indemnity Insurance
  • Local Authority Bonds
  • Project Supervisor Appointments
  • Assigned Certifiers

The list goes on.  When Bank funding is being secured most lenders will be looking to have a full suite of construction documents executed to make sure they can move in and secure (and complete – through step in rights) a development if the borrower gets into trouble.  One of the key documents they will look for is a Collateral Warranty.

A Collateral Warranty sits alongside a main document (Building Agreement, Professional Appointment) and creates a binding contract between a beneficiary (say a Bank or a Landlord or a Tenant) and a contractor or a design team member.  Without it, if a building suffers damage in the future which in turn causes loss to the beneficiary, there would be no way for the beneficiary to claim against the person responsible (e.g. the architect, or engineer or contractor). The Collateral Warranty gives them “direct access” to make a claim if they suffer loss.  Warranty claims are rarely prosecuted but the critical elements of any Collateral Warranty are:

  1. Level of PI cover required to be maintained
  2. Duration of the Warranty (6-12 years)
  3. Assignability

In all construction projects these documents will be critical to funders and acquirers/tenants so making sure you have a good suite of construction documents approved and in place before turning the sod will help immensely when drawing down finance and working through a project.

The fact that a Collateral Warranty exists does not always mean that it can be enforced.  In many cases building defects can be hard to detect for many years.  Also in the last few years a lot of construction businesses closed or went bust, meaning their warranties became pretty useless for anyone who had one.  Whilst the documents typically contain commitments to maintaining Professional Indemnity Insurance for a period of years after the building is completed, policing that can be very difficult (often impossible).

The big question – are collateral warranties really of any substantial value?  The absence of litigation on warranties suggests that whilst they are nice to have, they may not in reality provide significant protection – especially in a difficult market where the “mark” for the warranty might be bust or close to it.

The answer:

Do your due diligence and make sure you appoint the best people for the job, not just the cheapest. The best ones (contractors, design professionals) tend to (a) stick around, (b) have insurance to back up their warranties and (c) have reputational concerns about leaving jobs unfinished.  Whilst that may result in premium cost up front, it gives substantial comfort to banks and others when you are looking to bring finance on board to build.

John Hogan advises developers on acquiring and developing sites – contact him for more information at jhogan@leman.ie.


This publication is for guidance purposes only. It does not constitute legal or professional advice. No liability is accepted by Ogier Leman for any action taken or not taken in reliance on the information set out in this publication. Professional or legal advice should be obtained before taking or refraining from any action as a result of the contents of this publication. Any and all information is subject to change.

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