Modular Construction – some legal considerations

In the UK, modular construction has for a long time been viewed through the ‘prefab’ home experience of the post-war emergency homes programmes. Also, mortgage lenders have been wary of this form of construction and in turn obtaining new home structural warranties for modular buildings has not been an option.

However, we might be seeing a change of outlook for this form of procurement and with the critical need to provide more homes in particular, along with advances in applicable technology, modular homes or other form of modular buildings are becoming more acceptable.

The benefits of modular or off site construction are said to include:

• An energy efficient end product resulting in lower energy bills for occupiers
• A lower carbon footprint during the production and development process meaning a sustainable model of construction
• A centralised factory production model meaning in principle, buildings with fewer defects and lower long-term maintenance costs
• Faster development delivery.

The contracts

When it comes to the contracts for a modular housing development, what needs to be considered? Although such a housing development may end up looking similar to a traditionally built project, the route to get there is different, and as such these factors need to be reflected in the procurement contracts.

As modular developments take different forms ranging from flat pack components which are assembled on site to complete structures – including fully fitted out modules being craned in – there are as of yet no standard form modular construction contracts as there are for traditional buildings.

However, one of the widely used standard form building contracts – such as those published by the Joint Contracts Tribunal (JCT) and the NEC building contracts – all have at least some of the features which are relevant to modular construction and so can be a starting point. However, account needs to be taken for process of manufacture, delivery and construction for the modular project in question.

For example, in a traditional building contract when it comes to a conventional traditional brick housing development there is little unique intellectual property (IP) and the methods of construction are widely applied across the building sector. As such the intellectual property provisions in the JCT contracts for example usually are accepted as standard wording.

Intellectual property

When it comes to modular construction the IP position is very different. A producer or manufacturer of modular buildings will have invested in the design of the modules and so there will likely be a much greater interest in the IP they want protected.

However, the employer will need to have use and management of all designs and other copyright materials in order to build out the project, and to be able to maintain and extend it as required. In addition, relevant third parties such as funders will also want licences over any IP materials.

As such, in a modular contract greater consideration needs to be given as to what rights over designs and other materials the employer gets to have rights and over, what IP limitations will apply as to what that can be used for and to whom any rights can be shared with.

Rights to inspection

In regard to monitoring progress of the relevant works, a building contract such as the JCT includes provisions entitling the employer and its team to inspect the site and to evaluate progress. Such contracts will also include clauses to manage rights of access to a site, requiring those who do so to comply with health and safety and site access procedures, and to not interfere with the progress of the works.

In the context of modular construction the employer will want rights to inspect progress including when the project commences on site with groundworks, services and foundations. However, the employer will also want rights to monitor at a much earlier stage.

The employer may want to be able to identify potential problems in modules while they are on the production line. If faults are not identified in good time the same problems may end up being replicated in all modules being constructed. However, the employer is unlikely to be able to ‘open up’ a module to see the inner features – for example the services elements such as the electrics which will be embedded behind the pre-installed walls. Therefore, the employer will want to be able to inspect the modules whilst they are being assembled. That will require the contract to provide rights to inspect in the factory.

The employer will need to consider where the factory is, particularly if production is happening outside of the UK. If manufacture is taking place abroad the contract will need to cover relevant UK design regulations.

Also, while UK legislation such as the Construction Design and Management (CDM) Regulations and the Building Regulations apply to the project the employer will also need to ensure that these legal requirements have been complied with during the design, production and later construction phases of the modules.

Payments

When it comes to payments, traditional building contracts generally work on the basis of a stage or periodic instalment payment mechanism. When it comes to traditional forms of construction there will be statutory payment requirements which apply under the Construction Act to provide for interim payments. Also the contractor will need to be considered if it is to be kept solvent and a successful completion achieved. The employer will have some protection in that while the works progress, the value of the employer’s property increases.

In modular construction however, the same incremental increase in value is not the same. In a modular project the producer’s costs may need to be covered before anything turns up on site. The contract will need to be set up so that the producer is financed for its production stage.

Contracts for modular construction will need to ensure that ownership of modules transfer to the employer, possibly while they are still at the factory – including the possibility of provisions allowing transfer while the modules are still being built.

Such a transfer of ownership can be achieved by way of title vesting certificates and in which case the contract will need to specify when ownership transfers, what form of vesting certificate is to be used, who issues that vesting certificate and how to identify what modules and materials the vesting certificate relates to.

Insolvency risks

In regard to the risk of insolvency, this can be particularly difficult to account for when it comes to modular construction.

In a traditional construction project contract there will be provisions to facilitate the employer’s continuation with the works. While an employer will have paid out for the work undertaken up to termination, as the employer owns the land on which the project is being constructed then any buildings constructed on that land will usually become fixtures and so pass into the ownership of the employer. The employer will usually be able to find another traditional builder to come on board and achieve practical completion.

However, it is more complicated when it comes to modular construction including if it comes to needing another contractor to take over. Modules are likely to be specialist and can be unique to the original producer. While the employer may have agreed a right to step in to take over production in practice that may not be a possibility. As such, the risk of producer insolvency could result in the project being abandoned and the employer having to clear the site and start again.

Risks of this kind might be mitigated by way of performance bonds or guarantees, however the employer will need in depth financial due diligence in regard to the stability of the producer, and for that to be updated as an ongoing requirement during the life of the project.

Transportation

Where the employer has secured ownership transfer of the modules before they leave the factory, contractual clauses relating to transport are an important consideration when it comes to modular construction.

There will need to be provisions in the contract to manage risks during and after transportation along with the transportation arrangements of the modules. Even where damage is at the risk of the producer both parties will be eager to avoid any delay and disruption caused through damage.

Insurance provisions

When it comes to the insurance provisions in such contracts, issues to consider include, risks during transport, insurance at the production facility including insurance of materials and clear definition of the exact point at which ownership of the module transfers from the constructor to the employer.

The above is a sample of some of the key issues to consider in this context. If you wish to speak to one of our specialist advisors about modular construction concerns then please contact a member of our Construction and Engineering team.