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Contracts (rights of third parties) bill
This Bill, which is expected to reach the Statute Book in the middle of this year, will introduce major changes in almost every area of legal practice. The impact on landlords and tenants, developers, architects, funders and surveyors will be significant.
The rights provided
Under Section 1:
A person who is not a party to a contract ("a third party") may in his own right can enforce a term of the contract if:
(a) a contract expressly provides that he may, or(b) the term purports to confer benefit upon him.
It will no longer be the case that only a party to a contract can sue on it. A third party will be able to enforce the term of a contract if it was made for his benefit. The term, in fact, need only "purport" to confer a benefit on him.
Who is the third party?
The third party must be identified in the contract by:
as a member of a class; or
as answering to a particular description.
The third party need not even be in existence when the contract is entered into. An example of a "class of persons" might be "occupiers of the premises" or "tenants on the estate".
The third parties rights will arise when it has communicated its consent to the term of the contract to the contracting party or the contracting party is aware, or ought to have been aware that the third party would rely on the term.
Effect of the new rights
Where a third party acquires a new right under the Act, it will have the same remedies available to it as if it had been a party to the contract. For example, damages, injunction and specific performance. This will have major implications in a number of areas of Property Law particularly in the enforcement of leasehold covenants. This is because parties other than the original parties to a lease are frequently affected by breaches of covenants in the original lease. For instance, tenants of a shopping centre unit would usually covenant with the landlord to use the unit for retail purposes or to keep the premises open for trade. The covenant will benefit both the landlord and all of the other tenants in the centre. So long as the covenant is expressed to be for the benefit of all the other tenants, these tenants will be able to enforce the covenant under the terms of the new Act. Similarly a covenant by a landlord not to permit adjacent premises to be used in competition with premises demised to a particular tenant can be enforced by other tenants whose interests are adversely affected by the landlord's breach. Leasehold Covenants not to use the premises in any way so as to constitute a nuisance to the landlord will, in the same way, be capable of being enforced by other tenants and adjoining owners.
Covenants in sub-leases: landlords covenants in sub-leases, for instance to provide services or to insure premises, will be enforceable against a head landlord by a sub-tenant and vice versa.
Developments: where a developer has taken into consideration the requirements of a tenant in agreeing specifications for any building, the tenant will now potentially have redress directly against the professionals involved in its design. Under the existing law, only the developer could bring a claim against the professionals for breach of contract.
Collateral warranties: in theory, there should no longer be any need for collateral warranties, since third party rights may be expressly set out in the principal contract.
It is important to note that the Act will not have retroactive effect, and will only affect contracts entered into after its enactment.
Potential difficulties for landlords
Once third party rights have arisen under a contract, the parties to the contract may not cancel or vary the terms if this would extinguish or alter the third party's rights without the consent of the third party. Applying the last example, any variation to an agreement between a developer/landlord and a contractor would require the consent of the proposed tenant.
Protection for landlords
Defence/set off. A landlord faced with a claim by tenants with third party rights has available to him any defence or set off which would be available had the claim been brought in the usual way by the other parties to the contract.
Protection from "double liability". This provides for the situation where a term of a contract is enforceable by a third party, and the original contracting party has recovered a sum in respect of loss suffered by the third party. The court may reduce any award to the third party to take into account the sum recovered by the original contracting party.
Exclusion of the Act
The provisions of the Act may be excluded in whole or in part. For example, parties may dispense with the need for third party consent to the variation of the terms of the contract.
The Bill clearly has significant implications for the property industry. In very broad terms, new classes of beneficiaries of contracts will emerge where currently rights are circumscribed by privity of contract. Extreme care in the drafting of documents will need to be taken to ensure that third party rights will not arise inadvertently.
It is probably sensible for existing "standard" documentation to be reviewed to avoid its inadvertent provision of rights to unintended beneficiaries.
Given the uncertainty engendered by the new legislation, it seems likely that in practice exclusion of the Act will be commonplace.