Quantifying compensation for defective works: repair cost, loss of business, diminution in value

A project owner (maître d'ouvrage) who discovers water infiltration in a façade, a sagging floor or an undersized air-conditioning installation instinctively thinks in terms of the cost of works. That is the first error in quantifying the claim. For an investor, the cost of remedial works is often only a fraction of the real exposure: rental vacancy during the works, the tenant's loss of business passed back through a recourse claim, and the residual discount on the asset at resale frequently weigh more than the contractor's quotation. These heads of loss must still be claimed, documented and, above all, included in the court-appointed expert's brief before the report is filed. This guide sets out the heads of loss that the courts actually allow, those they reject, and the way the court-appointed expert's investigation determines the final amount of compensation for defective work.

The basis of liability determines the compensable base

Before quantifying, the claim must be characterised. The scope of compensation for defective building work varies according to the regime relied on, and that characterisation determines the debtor, the time limit and the base alike.

Defects noted at acceptance fall under the guarantee of perfect completion (garantie de parfait achèvement) in Article 1792-6 of the French Civil Code, which requires the contractor to remedy, for one year, the reservations recorded in the minutes and the defects reported afterwards. This guarantee covers repair in kind. It does not preclude a parallel claim for damages for ancillary losses, but it does not itself cover them.

Separable items of equipment fall under the two-year functioning guarantee (garantie de bon fonctionnement) in Article 1792-3, running for two years from acceptance. Defects of ten-year gravity, that is, those that compromise the solidity of the building or make it unfit for its purpose, fall under Articles 1792 and 1792-2, with the presumption of liability borne by the builders and the ten-year limitation period in Article 1792-4-3. The allocation of defects between these regimes is set out in our article on the choice between ten-year, two-year or perfect completion guarantee according to the nature of the defect.

One category remains decisive in practice: intermediate defects, that is, those that appear after acceptance without reaching the ten-year threshold of gravity and without affecting an item of equipment subject to the two-year guarantee. They fall under ordinary contractual liability under Article 1231-1 of the French Civil Code, which requires the project owner to prove fault, and no longer merely a defect. The consequence for quantification is direct: on this basis, Article 1231-3 in principle limits compensation to the damage foreseeable when the contract was concluded, except in cases of gross or wilful misconduct, and Article 1231-4 requires that the loss be the immediate and direct consequence of the non-performance. An investor claiming loss of business on an intermediate defect will therefore meet a resistance that the ten-year regime does not raise.

What structural damage insurance pre-finances, and what it leaves to the investor

Structural damage insurance (assurance dommages-ouvrage) under Article L. 242-1 of the French Insurance Code pre-finances, without any inquiry into liability, the cost of works to repair defects of ten-year nature. It offers a considerable cash-flow advantage, subject to strict time limits: the insurer must notify its position on the principle of cover within sixty days of the claim declaration, and present an offer of compensation within ninety days. On the application of these time limits, see our analysis of how to invoke structural damage cover and of the penalty for the insurer's silence.

But in its compulsory cover, structural damage insurance covers only the cost of the works. Consequential losses, loss of rent, loss of business, rehousing costs, are compensated only under optional extensions, whose subscription and ceilings must be checked in the special conditions. For an investor whose remedial cost is modest but whose asset is entirely blocked for eight months, this distinction is fundamental: recovery of the consequential losses will come through the ten-year civil liability of the builders and their insurers, not through structural damage insurance.

The cost of remedial works: the main head of loss, and the most technically debated

The cost of remedial works is the foundation of any compensation for defective work. It is quantified by reference to a technical solution settled by the court-appointed expert, and not by simply adding up quotations produced by the project owner.

Repair or full replacement: the technical solution determines the amount

The most costly discussion rarely concerns the unit price of the services, but the choice between a localised repair and a complete replacement. A localised waterproofing defect may call for repair by injection or for complete removal of the waterproofing system, a ratio of one to ten in the amount. The builders systematically defend the minimal solution, the project owner the lasting solution.

This is precisely where the quantification is won. The project owner must obtain from the expert an opinion on the durability of the proposed solution, on the guarantees it will engage, and on the risk of the defect reappearing. A remedial solution that cannot be insured, or that does not restart a guarantee cycle, is not a solution. Having the expert record this point by means of a dire (written observations to the expert) is better than arguing it after the report has been filed.

Wear and tear, betterment, VAT: three deductions to neutralise or anticipate

Three reductions are systematically sought by the defence.

First, wear and tear. The courts in principle reject any reduction where replacement of the work is made necessary by the defect itself, in the name of the principle of full compensation: the victim must be put back in the position in which he or she would have been had the defect not occurred, with neither loss nor gain. The reduction becomes arguable where the remedial works give the project owner a work that is objectively superior to the one contractually owed.

Second, betterment. If the remedial works require a superior technical solution, or incorporate compliance with standards introduced after the original contract, the share corresponding to that improvement may be deducted. The argument succeeds in particular where the remedial works bring an improvement in the energy performance of the asset, a subject that has become central in expert discussions on commercial buildings.

Third, VAT, a head of loss frequently neglected and yet immediately quantifiable. Compensation repairs an actual loss. A project owner subject to VAT and entitled to deduct it does not bear the burden of the tax: compensation is then fixed exclusive of tax. A landlord of residential premises, not subject to VAT on rents, will on the other hand obtain compensation inclusive of tax. For an investor who has opted to subject commercial rents to VAT, the difference must be factored in at the outset when assessing net exposure.

Updating the cost to the date of the decision

The loss is assessed as at the date on which the judge rules. Between the quotation produced during the expert's investigation and the judgment on the merits, two to four years may pass, a period during which building cost indices have moved. The project owner therefore has an interest in asking the expert for an indexed valuation, by reference to the BT01 index or a trade-specific index, and in updating the quotations before the hearing. Failing that, the compensation obtained will not cover the real cost of the works.

The cost of the remedial works must also be distinguished from the related costs they generate: remedial project management, inspection body, health and safety coordination (SPS), removal and storage of furniture, temporary installations, and making good of the finishes affected. These items are quantified separately and are regularly forgotten in initial claims.

Consequential losses: loss of business and loss of rent

It is on this ground that the gap widens between a well-prepared case and a poorly prepared one.

Loss of business is quantified by margin, never by turnover

Where the project owner itself operates the property, a hotel, a shop, a logistics site, occupied offices, partial or total immobilisation generates a loss of business. The rule of quantification is constant: the compensable loss corresponds to the loss of gross margin, that is, lost turnover less the variable costs not incurred, increased where appropriate by the fixed costs that remained payable by the operator without any counterpart.

A claim based on turnover is systematically reduced. Quantification requires the production of tax returns over several financial years, analytical balances, a comparison with a reference period, and an analysis of the external factors that may explain all or part of the fall in activity. In practice, this work falls to an accounting or financial sub-expert (sapiteur) appointed by the expert under Article 278 of the French Code of Civil Procedure, which allows the expert to bring in a specialist from another discipline. Requesting this appointment presupposes that the head of loss was anticipated in the expert's brief.

The landlord: loss of rent, rent-free periods granted, the tenant's recourse

For a landlord, loss of business takes the form of a loss of rental income, which breaks down into several distinct heads of loss.

• Rent not received during the period when the premises were unavailable, supported by the leases, rent receipts and calls for funds.
• Rent-free periods or rent reductions granted to the tenant to compensate for the disturbance, provided that they are formalised by an amendment and causally linked to the defect.
• The tenant's early departure and the resulting rental vacancy, provided it is shown that the termination genuinely stems from the defect and not from the tenant's own commercial decision.
• The additional marketing cost of a unit that remained vacant, re-letting fees, and incentives granted to the new tenant.
• The sums that the landlord is ordered to pay to the tenant under its obligation to deliver the premises, which it then passes on by way of recourse against the builders.

This last point deserves attention. A commercial tenant whose premises are rendered partially unusable will act against its landlord, who owes the obligation of delivery and of peaceful enjoyment, without having to prove any fault on the part of the builders. The landlord must therefore join all the contractors and their insurers as third-party defendants in the same proceedings, failing which it will bear alone an order that it will then struggle to recover in a second set of proceedings.

Loss of enjoyment: assessed by reference to the rental value

Loss of enjoyment compensates for the deprivation or restriction of use of the property, independently of any loss of income. It concerns the owner-occupier project owner, but also the investor who keeps a unit vacant or premises whose use is impaired without being interrupted.

The valuation method used rests on three parameters: the reference rental value of the property, the percentage of floor area or usefulness affected, and the duration of the disturbance. An infiltration that makes one room unusable on an office floor is quantified by applying to the monthly rental value the ratio of floor area put out of use, multiplied by the number of months elapsed from the appearance of the defect to the actual remedial works.

Two points of caution determine the amount awarded.

The first concerns duration. Loss of enjoyment runs until the remedial works are carried out, including the period of execution. Compensation must therefore be claimed for the period already elapsed, but also for the future period corresponding to the remedial works, as estimated by the expert. Omitting the future period amounts to giving up several months of compensation.

The second concerns the rule against double recovery. A landlord cannot obtain at the same time loss of rent on premises and loss of enjoyment on those same premises for the same period: that would be double compensation under the same head. The breakdown must be rigorous, unit by unit and period by period. On the other hand, cumulation is allowed where the bases differ, for example a loss of rent on the let floors and a loss of enjoyment on the common parts or on a unit occupied by the owner.

Diminution in value of the asset: a residual head of loss, not an alternative one

Depreciation of the asset is the head of loss that is least well understood and most often rejected, because it is generally wrongly presented as an alternative to the cost of remedial works.

The reasoning is as follows. Where full remedial works are technically possible, compensation for the cost of the works restores the value of the asset: claiming a diminution in value in addition amounts to asking twice for the repair of the same damage. This head of loss therefore stands on its own only in three situations.

First situation: the defect cannot be repaired, or its remedy requires demolition and reconstruction whose cost is manifestly disproportionate to the real usefulness for the project owner. The courts then accept limiting compensation to the depreciation suffered by the building. The investor project owner must weigh this risk: for an aesthetic defect or a minor contractual non-conformity, the claim for replacement may be rejected in favour of a depreciation award that is markedly lower.

Second situation: the remedial works leave a residual depreciation, sometimes described as stigma loss. A building that suffered serious structural defects, even if perfectly repaired, may bear a discount on resale, which the purchaser will negotiate with knowledge of the incident once the relevant documents are in the due diligence file. This head of loss is compensable but requires a quantified demonstration, generally by a valuation sub-expert (sapiteur), and not a mere assertion.

Third situation: the defect durably affects the usability of the asset, for example by permanently reducing the usable floor area, by degrading energy performance in a context of renovation obligations for the commercial building stock, or by preventing a planned use. The diminution in value is then measured by the difference in market value between the compliant asset and the asset as delivered, by income capitalisation or by comparison.

Heads of loss that the courts reject

A credible quantification requires knowing what will not succeed, so as not to weaken the whole claim with manifestly excessive items.

• Hypothetical or contingent loss. A loss of rent calculated on a lease under negotiation that was never signed, a loss of business projected on an unrealised business plan, a resale project abandoned with no mandate or undertaking: these claims are rejected for lack of certainty. They can sometimes be recharacterised as loss of a chance, but are then assigned a probability coefficient that greatly reduces the amount.
• Indirect losses. Article 1231-4 of the French Civil Code compensates only the immediate and direct consequences. A cascade of remote economic consequences, loss of financing, increased cost of a third-party transaction, is regularly rejected for breach of the chain of causation.
• Unjustified internal costs. The time spent by the project owner's teams handling the incident, quantified on a flat-rate basis, is admitted sparingly and requires precise justification of the time spent and the hourly costs.
• Non-material loss of a legal entity. It is not excluded in principle, but compensation requires proof of a distinct harm to reputation or commercial disturbance, which a mere construction defect does not establish.
• Items aggravated by prolonged inaction. French law does not require the victim to limit the damage in the interest of the person liable. The courts nevertheless assess causation strictly where the aggravation results from a failure by the project owner, who allowed a waterproofing defect to spread for several years without any protective measure. Putting in place an interim solution, and having the expert record its cost, protects the main head of loss.

Finally, compensable losses must be distinguished from procedural costs. The costs of the court-appointed expert's investigation form part of the costs (dépens) within the meaning of Article 695 of the French Code of Civil Procedure and follow the rule in Article 696. Lawyers' fees fall under Article 700. By contrast, the technical assistance costs incurred by the project owner, an insured party's expert, a project manager engaged to follow the investigation, a design office asked to contest an assumption of the expert, constitute a separate compensable loss provided they were necessary to defend the project owner's interests.

The court-appointed expert's investigation: the real place where the claim is quantified

In construction litigation, the amount of compensation is determined in the expert's investigation, not at the hearing. The report is the central document in the file, and the courts rarely depart from it on quantum, even though Article 246 of the French Code of Civil Procedure leaves them free to do so and Article 238 forbids the expert to give legal assessments.

The art. 145 CPC summary expert-appointment application: the brief determines everything

Article 145 of the French Code of Civil Procedure makes it possible to obtain, before any proceedings on the merits, a measure of inquiry where there is a legitimate reason to preserve or establish evidence of facts on which the outcome of a dispute may depend. The summary application for the appointment of an expert under Article 145 (référé expertise) is the founding act of the case, and its quality determines the economic outcome. The rules governing this measure of inquiry are set out in our article on the summary expert-appointment application before a property or construction dispute.

The brief must be drafted by the applicant, not taken from a template. Besides the classic heads, recording the defects, investigating their causes, determining technical responsibilities, describing the remedial works and quantifying their cost, it must include heads relating to consequential losses: assessing the length of time the property is immobilised during the remedial works, determining the areas and uses affected, providing all information needed to assess the loss of enjoyment, the loss of rent and the loss of business, and where relevant the residual depreciation of the asset after the remedial works. The applicant must also request authorisation for the expert to bring in a sub-expert (sapiteur).

A brief that is silent on these points produces a report that is silent. Obtaining an extension of the brief afterwards requires a further referral to the supervising judge, an additional deposit and several months of delay.

Joining all the parties from the outset

The expert's report is enforceable only against the parties called to the investigation. The project owner must therefore join in the same summary application all the persons potentially liable, contractors, project manager, design office, technical inspector, house builder or seller off plan (vendeur en l'état futur d'achèvement), together with their insurers and the structural damage insurer. Any omission is paid for at the merits stage, in the form of a debate on non-enforceability and a risk of a partial order leaving a share of the loss without a solvent debtor.

Dires are the only procedural weapon during the investigation

Article 276 of the French Code of Civil Procedure requires the expert to take into account the parties' observations and claims and, where they are in writing, to attach them to the opinion, stating what action was taken on them. The dire is therefore the instrument by which the quantification is built.

An effective dire does not argue in general terms: it produces the documents, proposes a method, cites the omitted heads of loss and makes a precise request. On consequential losses, it attaches the leases, rent rolls, tax returns, accountants' certificates, rent-free amendments and the tenants' letters. Waiting for the draft report to raise a head of loss is a procedural strategy error: the expert has already settled on a method.

The application for an interim payment in parallel

Where liability is not seriously contestable, in particular after a clear draft report or report, the project owner may seek an interim payment (provision) under Article 835, paragraph 2, of the French Code of Civil Procedure before the president of the judicial court, or under Article 873, paragraph 2, before the commercial court judge. This route makes it possible to fund the remedial works and to stop the loss of enjoyment without waiting for the judgment on the merits. For an investor, the choice is economic as much as legal: stopping the loss of rent rather than letting the loss run on to enlarge the claim.

Conclusion

The quantification of compensation for defective work is not decided at the merits stage, it is decided in the fifteen days that precede the summons in summary proceedings. A project owner who is an investor and who limits the brief to the technical findings will obtain a remedial cost and nothing else, even though the real exposure lies in the loss of rent, the loss of business and the depreciation of the asset. Our position is consistent: drafting the expert's brief is the most profitable act in the whole case, and it must be prepared with the accounting and rental information already gathered, not afterwards.

Three practical steps before starting proceedings. Have a rent roll and a comparison of operating results over a reference period drawn up before the summons, to serve as the basis for the sub-expert. Include in the brief explicit heads on immobilisation, enjoyment, rent, operation and residual depreciation, together with authorisation to use a sub-expert. And have an independent adviser check the list of parties to be called to the investigation, insurers included: an omission at this stage cannot be made good without loss of time and of value.

Frequently asked questions

What heads of loss can be claimed for defective work? The project owner can claim the cost of the remedial works and the related costs, remedial project management, inspection body, removal and storage, consequential losses, loss of rent, loss of business assessed on gross margin, loss of enjoyment, as well as the technical assistance costs incurred to defend its interests. A diminution in value of the asset is compensable only if the defect cannot be repaired, if its repair is manifestly disproportionate, or if a residual depreciation remains after the works. Hypothetical loss and indirect loss, within the meaning of Article 1231-4 of the French Civil Code, are rejected.

How is loss of enjoyment calculated for a property? The valuation rests on the reference rental value of the property, the percentage of floor area or usefulness affected by the defect, and the duration of the disturbance. The loss runs until the remedial works are actually completed, including the period of the works, which means compensation must also be claimed for the future period estimated by the expert. A landlord cannot combine, for the same unit and the same period, a loss of rent and a loss of enjoyment.

Can compensation be obtained without carrying out the remedial works? Damages are in principle freely available and their award is not subject to the funds actually being applied to the repair. The courts nevertheless assess the reality of the loss as at the date on which they rule: resale of the asset before any remedial works, at a price unaffected by the defect, is a circumstance likely to lead to rejection or reduction of the claim. For an investor in a disposal phase, the chronology between sale and proceedings must be examined before issuing a summons.

Is compensation for defective work fixed exclusive or inclusive of tax? It is fixed exclusive of tax where the project owner is subject to VAT and entitled to deduct it, since it does not bear the burden of the tax. It is fixed inclusive of tax where the owner is not subject to VAT, the usual case of a landlord of residential premises. An investor who has opted to subject commercial rents to VAT must factor this difference into the assessment of net exposure from the investigation stage.

What is the benefit of an art. 145 CPC summary expert-appointment application before suing on the merits? Article 145 of the French Code of Civil Procedure makes it possible to obtain a measure of inquiry before any proceedings, where there is a legitimate reason to establish evidence of facts on which the outcome of the dispute may depend. It halts the progress of the incident by organising an adversarial record, has an expert appointed who will determine causes, technical responsibilities and remedial cost, and makes it possible to call all the parties involved and their insurers at once so as to make the report enforceable against them. The quality of the brief, in particular its heads relating to consequential losses, directly determines the amount that can be obtained on the merits.

Does structural damage insurance compensate loss of rent? Not under the compulsory cover in Article L. 242-1 of the French Insurance Code, which pre-finances only the cost of works to repair defects of ten-year nature. Consequential losses are covered only under optional extensions, whose subscription and ceilings must be checked in the special conditions. Without an extension, recovery of loss of rent and loss of business requires an action against the builders and their ten-year liability insurers.

Within what time limit must action be taken against the builders after acceptance? Liability actions against the builders named in Articles 1792 and 1792-1 of the French Civil Code and their subcontractors are time-barred ten years from acceptance of the works, under Article 1792-4-3. The perfect completion guarantee in Article 1792-6 is limited to one year after acceptance, and the functioning guarantee in Article 1792-3 to two years. For a sale off plan (vente en l'état futur d'achèvement), the action in respect of apparent defects follows a separate timetable, built around Articles 1642-1 and 1648, paragraph 2, of the French Civil Code, which must be checked as soon as the delivery report is received.