Property developers now seen to warrant development work, irrespective of builder’s performance

Commercial Directions

On 3 August 2018, the NSW Court of Appeal handed down its decision in The Owners – Strata Plan No 66375 v King [2018] NSWCA 170. This case addressed the question of whether  previous owners of a strata development were liable to an Owners Corporation for building defects pursuant to the Home Building Act 1989 (NSW) (HBA).

A developer may now be seen as providing a warranty to a subsequent owner that the builder’s development work complies with the law, regardless of the builder’s performance.

The decision at first instance

In the original Supreme Court proceedings (Owners Strata Plan No 66375 v Suncorp Metway Insurance Limited (No.2) [2017] NSWSC 739), the Owners Corporation sued Mr and Mrs King (among other parties) regarding alleged building defects at a Camperdown property. The Kings were owners of the property (originally a warehouse) before and during its development. The Kings entered into an agreement with Meridian Estate Pty Limited, a company they controlled, to undertake the development of the property in exchange for a fee. Meridian engaged another company, Beach Constructions Pty Limited, to convert the warehouse into a mixed-use residential and commercial strata development.

A number of alleged defects were found in the completed development following registration of the strata scheme. The Owners Corporation contended that Mr and Mrs King were liable for the damage suffered as a result of the defects because they were ‘developers’ under the HBA and were liable for a breach of the statutory warranty under section 18B(c) of the HBA.

Section 18B of the HBA implies certain statutory warranties in any contract to undertake residential building work. These warranties include that the work will be done with due care and skill and in accordance with the plans and specifications set out in the contract, and any materials supplied by the contractor will be fit for their intended purpose.

Section 18C provides that a subsequent owner of a property, if their immediate predecessor in title was a developer, current or former holder of a contractor licence or an owner-builder who has done residential building work on that property, is entitled to the statutory warranties as though the subsequent owner had a contract with the immediate predecessor.

The primary judge dismissed the claim against the Kings because they were not ‘developers’ for the purposes of the HBA, finding that they were not parties to the building contract that Meridian had with Beach Constructions.

The appeal

The Owners Corporation appealed the initial decision on the basis that the primary judge erred on two findings:

  1. Failing to find that the Kings were party to the relevant building contract, and
  2. Finding in any event that the Kings were not liable for certain ‘design defects’.

The Court unanimously found on the first point that on the particular facts of the case, the most probable inference was that the Kings had executed the contract in their personal capacities and were therefore ‘developers’ for the purposes of section 3A of the HBA.

As to the second issue, a majority of the Court of Appeal (one Justice dissenting) agreed that on the proper construction of section 18C of the HBA, the warranties implied by section 18B in the contract between Beach Constructions, Meridian and the Kings were imported into the notional contract between the Owners Corporation and the Kings. Because the Kings were held to be developers under the HBA, they were liable to the Owners Corporation for the damages sustained as a result of the breach of the statutory warranty.

Significance

The question of whether the Kings were ‘developers’ under the HBA has been clarified by amendments made to the HBA by the Home Building Amendment Act 2011 (NSW). That 2011 Act amended section 3A of the HBA to deem the owners of the land on which residential building work is undertaken as ‘developers’. The reason the original case considered this point was because the proceedings were commenced in 2007, prior to the amendment, but were only heard by the Supreme Court in 2017.

Although it seems likely that leave to appeal to the High Court of Australia might be sought from the Court of Appeal’s decision, until the outcome of any appeal or other overriding High Court decision is known, the decision now supports the proposition that a developer (which includes an owner of land) will be liable to a subsequent owner for HBA work regardless of the terms of the building contract between the developer and the builder and further, that the developer will warrant that the building work complies with the law.

Further information / assistance regarding the issues raised in this article is available from the author, Jim Griffiths, Partner or your usual contact at Moray & Agnew.


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