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Sat 12 Jun 2010 04:00 AM

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Haunted by ghost buildings

As the GCC looks to push forward with new developments, contractors working in Dubai need to consider the pros and cons of reviving skeleton structures. Elizabeth Broomhall reports.

Haunted by ghost buildings
Developers and contractors from across the GCC are turning to ghost structures to increase profits.
Haunted by ghost buildings
Article 880 of the civil code makes the new contractor liable for the partial or total collapse of a ghost structure.
Haunted by ghost buildings

As the GCC looks to push forward with new developments, contractors working in Dubai need to consider the pros and cons of reviving skeleton structures. Elizabeth Broomhall reports.

Entering into a new era of economic stabilisation, the GCC construction sector is optimistic about a wave of developments set to move its regional markets forward. From Abu Dhabi to Saudi Arabia, developers, contractors and consultants are preparing for a successful, albeit gradual upturn.

On the contrary, in Dubai, attention is turning to those projects that were cancelled or delayed during the downturn. Seeking new revenue streams and more work, developers and contractors from across the GCC are looking to the skeleton structures or 'ghost buildings' that populate the Dubai skyline with a view to resurrecting old projects and improving their profits.

However, it is yet to be seen whether these ghost sites, with their degrading structures and rusty scaffolding, will yield any commercial value for contractors when balanced against a high number of risks. Indeed, without any realistic analysis of the possibilities, companies could be stepping into a financial and legal danger zone as the economic viability and regulatory risks of these projects remains difficult to quantify.

Structurally speaking, ghost buildings present a variety of difficulties that could later transpire into significant legal and financial problems, whether they jeopardise the adequate provision and observance of health and safety policies, or the overall commercial success of a project.

"The main problem with stalled buildings is structural deterioration," says Meinhardt MENA principal structural engineer, Tanmay Biswas. In his view, the level of degradation of a ghost building depends on the stage at which construction was stalled, the quality of early building work, the duration of exposure to degradation triggers and the extent to which the building is protected from external forces.

"As we live in an aggressive environment," he adds, "the deterioration is fast and deep-rooted.  As an example, an incomplete structure will have lots of exposed and unprotected rebar or structural steel work which is likely to have started rusting. Depending on the duration of exposure, airborne salts may also have caused deterioration of the concrete, or ‘concrete cancer'."

And, as is often the case with ghost buildings, if the developers and contractors decide to change the use of the building, this is only likely to exacerbate risks, the old design structure being unable to support the new use.

As regards the knock-on effects of a high level of degradation, the first problem arising for contractors will be the high repair costs. Should the de-watering have been turned off at a site during the ‘silent' period for example, the costs of reviving the flooded structure could easily be prohibitively expensive.
A second concern revolves around health and safety. According to Biswas, where a site has been deserted for a long period, shoring failure or falling cladding is likely to compromise contractors' health and safety policies and leave them liable for workplace injuries or deaths.

But perhaps the biggest problem for a new contractor resurrecting a degraded, partially constructed building, is associated with its partial or total collapse. In this case, the new contractor and architect will be held strictly liable, with no burden on the previous contractor.

According to Mark Fraser, a partner at Taylor Wessing UAE, not only are there limited obligations on original contractors to ensure structures are fit for purpose and of satisfactory quality, but in the case of ghost buildings, the original contractor and architect are unlikely to be held liable for its collapse because an incomplete building has never in fact, been handed over.

"Under local laws," he explains, "[the original] contractor is obliged only to complete his work in accordance with the conditions of his contract. Local law does not recognise ‘fitness for purpose' and ‘satisfactory quality'. Likewise, a designer is obliged to exercise ‘care that a reasonable man would exercise', however, that standard of care is independent of the achievement of the original objective."

Meanwhile, article 880 of the civil code holds the new contractor solely responsible for the structure. "Article 880 states that a contractor and architect are jointly liable for ten years from the date of hand-over for the total or partial collapse of a building. In the context of ghost buildings, the original contractor and designer may not be liable if the building is not complete because it has not been handed over. Instead, the new contractor and architect will have decennial liability because it is they who will see the project through to completion."

Similarly, where the structure does not collapse but reveals some sort of structural defect, new contractors face the risk of being held jointly liable alongside original contractors. "In a situation where the original team working on the ghost structure has achieved sectional completion, (i.e. delivered part of the works) and the structural integrity of the building is defective," says Fraser, "depending on the nature of the defect, the old and new teams have strict liability, and could both be sued."

Faced with this prospect, contractors and design professionals are put in an extremely precarious situation when it comes to resurrecting ghost buildings, and their only chance of walking free in these cases arises from professional indemnity insurance cover, though even this, has its loopholes.

"Professional indemnity insurance will not cover a professional who is held strictly liable for a structural defect under article 880 of the civil code, unless the defect occurred because they breached the standard of care," explains Wayne Snow Senior Vice President of Marsh Insco. "In this sense, PI insurance may mitigate the strict liability, provided the professional is found to have been negligent and held legally liable [i.e. directly responsible] for the defect."

Further amplifying the problem is the fact that often, even if they commission a full site investigation, contractors and designers may be unable to prepare for latent defects, otherwise known as 'inbuilt defects' that go undetected by site inspectors, revealing themselves at a later date.
With these risks in mind, industry experts are asking developers and contractors to remain cautious when deciding to resurrect ghost or skeleton buildings in the first place.

"Should the contract not be commercially viable, both developer and contractor may end up incurring losses," says Fergal Harris, Director of Commercial Real Estate at Standard Chartered Bank in the region. Not only does he stress the need to consider the costs of restarting a project, including total costs to complete construction, financial, legal and due diligence costs, but in addition, he emphasises the importance of looking at timeframes for construction, and how this may further increase the costs and affect the financial viability of the project.

"If you are re-engaging in a project, then it is critical to consider time to acquire and complete, time to identify an opportunity and get it to a point where it's good to go," he said.

"It is important to note that what may be a good location today may not be a good location when you've finished constructing, bearing in mind it could take up to two years to re-engage and a further two years to get the project to a stage where it's fit for purpose. It is very important to think about what the building is going to be when it grows up and where it is going to be."

Other considerations, he says, include ownership of the building - which can be determined from the title deeds - as well as how the project is going to be marketed.

"Before engaging in a new project, it is important to consider getting paid for the highest and best use, a focus that is often missed," he says. Specifically, he suggests that a building need not always be resurrected for its original intent and purpose, but instead what might have been originally designed as a residential building could be more valuable as a school, hospital or office block.

"It is also crucial to pitch the property to the market at the level at which it actually is. So a Grade B building needs to be pitched as a Grade B building. Tarting it up and selling it as a Grade A building isn't going to work and certainly it is not going to fly in terms of rents or sales prices."

But above all he encourages contractors to be realistic, and potentially consider taking a stake in the property should they find it to be a good investment, as this will ensure they get paid. "When engaging in the resurrection of projects, ask yourself: Are they really ever going to be finished? Is there any commercial sense in finishing these projects? It is very important in this market because there is so much oversupply, of residential buildings in particular, and not every ghost building has the highest and best use purpose beyond what it is at the moment."

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