When it comes to warranties commonly used in the construction and real estate industries, whether you need a collateral warranty or a structural warranty depends on your position. Investors and buyers want to be confident that their properties are built to the highest standards, and developers and contractors want to ensure their liabilities are appropriately defined.
In either case, the right legal cover should be in place if buyers or lenders need to make a claim for repair costs resulting from defects that developers or contractors are responsible for.
These policies have different purposes, so here’s a quick guide to the differences between collateral warranties and structural warranties to help you decide which policy would benefit you most.
What is a collateral warranty for?
When a developer uses the services of a contractor or consultant to complete their construction project, they may require a collateral warranty to be set up alongside the original contract between the two professional parties.
This extends the contract to a third party beneficiary – typically the property buyer or tenant. The policy warrants to the buyer that the named parties will complete their work to the required standards set out in the primary contract, giving the buyer the right to recover losses if the named parties breach the contract terms.
The collateral warranty should specify the warrantor’s obligations and third party claim limitations, backed by the warrantor’s professional indemnity insurance policy. Collateral warranties are usually executed as deeds, lasting for 12 years.
Unless specified otherwise, collateral warranties normally don’t cover insolvency of the named parties, and may not be assignable if the original buyer sells the property to a new owner. If there is an issue covered by the warranty, it will also be the beneficiary’s responsibility to prove the warrantor’s negligence in a court of law.
What is a structural warranty for?
Structural warranties are typically set up by the developer or lead builder before the construction project commences, ensuring that professional inspections are carried out to confirm structural safety and compliance with building standards throughout the process.
This reduces the risk of latent structural defects developing due to poor workmanship or the use of faulty materials. Once the build is complete, the warranty is transferred to the buyer, who will then benefit from this cover for a minimum of 15 years.
If structural defects become apparent during this period, the policy holder can make a claim directly to the warranty provider, without having to prove negligence or who is at fault. This is faster and more convenient for the buyer, as the provider should pay out for a valid claim even if the responsible party has become insolvent or doesn’t have professional indemnity insurance.
Structural warranties are assigned to the property and stay with it for their duration, meaning they can be transferred to new owners if the property is sold any time within the policy term. The only downside is that these warranties are limited to solely covering structural defects.
Which warranty is better?
Though a collateral warranty and a structural warranty may seem similar in their overall provisions of protection for the property, they aren’t interchangeable.
Structural warranties are attractive because they help to avoid costly and lengthy court proceedings and are transferable, but they only apply to structural defects – whereas collateral warranties can provide cover for more comprehensive non-structural defects.
Which policy you need depends on the liabilities you’re trying to cover and the beneficiaries you want to appeal to. There are some cases where both policies may be necessary for the same project, so rather than deciding on one or the other, it may be best to look into both 12-year collateral warranties and structural building warranties.