“Substantial Completion” is a critical concept in construction contracts and one as to which parties often have contrary conceptions. Finding a definition of Substantial Completion acceptable to both the owner and the construction contractor on a project (not to mention one that aligns with the term in any related documents, such as a construction loan agreement or a lease) is an important component of construction contract negotiations. In addition to being a key project milestone, Substantial Completion often holds other contract ramifications. A substantial portion of any retainage may be released after Substantial Completion has occurred. Likewise, liquidated damages for late delivery often use Substantial Completion as the benchmark for when delivery has occurred.
The American Institute of Architects A201-2017 form (titled “General Conditions of the Contract for Construction”) defines Substantial Completion as “the stage in the progress of the Work when the Work or designated portion thereof is sufficiently complete in accordance with the Contract Documents so that Owner can occupy or utilize the Work for its intended use”. At Substantial Completion, the project is not finished. Work remains before final completion is achieved. Typically, the remaining work is limited to punch list items that do not materially interfere with the ability of the owner or the intended user to use the project for the intended purpose. See Viking Builders, Inc. v. Felices, 391 So.2d 302, 303 fn. 1 (Fl. Dist. Ct. App. 1980) (stating that a punch list is “a final list of small items requiring completion, or finishing, corrective or remedial work under a construction contract”). Landscaping work, for example, is a common punch list item. In J.M. Beeson Company v. Sartori, 553 So.2d 180 (Fl. Dist. Ct. App. 1989), the court found that a contractor’s work in constructing a shopping center was substantially complete because certificates of occupancy had been issued and tenants were able to occupy their spaces even though landscaping work had not been completed.
The A201 form definition of Substantial Completion is relatively circular and somewhat amorphous. It lacks discernable standards that (depending on the project and the nature of the work) an owner might want, such as a use and occupancy permit allowing the owner (or the intended user of the project) to lawfully use the project for the intended purpose.
The construction contract for a student housing project deal pursuant to which a developer/contractor is building a student housing facility for a college or university may require, as part of Substantial Completion, that the facility is ready for students to reside in the facility. Such a standard would entail not only the requisite occupancy certificate but also a furnished facility. In student housing deals, the project achieving a “ready-for-student-residents” state by a date certain (typically before the start of a designated school year) is critical for the college/university, with schools often seeking to require the developer/contractor to find hotel rooms for students if the target substantial completion date is missed.
From a contractor’s standpoint, a use and occupancy permit can be a challenging requirement for Substantial Completion as obtaining the permit is not entirely within the contractor’s control. Even though the contractor may have performed all of the construction work required under the contract for the project to be considered substantially complete, the issuance of a use and occupancy permit will necessitate a site visit by a governmental inspector to the project. The timing of that inspection depends in part on factors (such as the inspector’s availability) that are outside of the contractor’s control. Depending on the project, contractor’s work may be necessary but not sufficient for a use and occupancy permit to be issued. Other improvements to be performed by the owner or a tenant may need to be performed or certain personal property (such as fire extinguishers) that under the construction contract are not contractor’s responsibility may need to be installed before an occupancy certificate can be obtained. Contractor’s counsel may push for wording in a construction contract stating that if the contractor has performed all of the work required of it for Substantial Completion to be achieved and a use and occupancy certificate to be issued and the reason or reasons for the non-issuance of a use and occupancy permit are due to factors outside of the contractor’s control, Substantial Completion shall be deemed to have occurred for purposes of the construction contract (at least with respect to when liquidated damages are due or retainage is largely released). An owner may resist such language, taking the position that the contractor, rather than the owner, is in a better position to facilitate obtaining a use and occupancy permit.
A lender on a construction project is generally aligned with the owner (at least in the owner/contractor negotiations) in terms of how it wants Substantial Completion to be defined. Both will want to have a stringent definition apply to the contractor. A lender may want to place additional conditions on and/or requirements for Substantial Completion, such as a party taking actual occupancy of the premises and/or a tenant paying rent. An owner should examine any such additional conditions closely. To the extent that lender seeks, as part of the prerequisites for Substantial Completion, conditions that are outside of the owner’s control (such as a tenant taking actual possession of the premises and/or paying rent), the owner should resist those additional conditions.
From a tenant’s standpoint in lease negotiations, it may also want Substantial Completion as defined in the lease to include the delivery to tenant of a use and occupancy permit. The owner/landlord may resist such a condition, as the delivery of a use and occupancy permit may require work and/or the installation of personal property that is beyond what the owner/landlord had agreed in the lease to perform. Coordination with an inspector must also occur. In this regard, the owner/landlord’s concerns may mirror the contractor concerns noted above.
When the term Substantial Completion is defined in multiple related contracts – a construction contract, a construction loan agreement, and/or a lease, attention should be paid to harmonizing the respective definitions. At a minimum, an owner that is a party to several such related contracts on a project should aim to avoid inconsistent or worse contradictory definitions of Substantial Completion.
