Purchasers of residential property in Victoria are afforded significant protections against building defects pursuant to the statutory warranties contained in the Domestic Building Contracts Act 1995 (“the Victorian Act”). Similarly, purchasers of commercial property are often protected by the law of negligence pursuant to tort principles.

However, in the New South Wales case of Owners Corporation Strata Plan 61288 v Brookfield Multiplex [2012] NSWSC 1219 (“the Brookfield case”) the Owners Corporation plaintiff (“the OC”) was unable to sue a builder for alleged defective works contained in a serviced apartment scheme. This is because its contractual rights had expired (and the common law doctrine of privity applied), it did not have the benefit of the statutory warranties under the Home Building Act 1989 (“the NSW Act”), and the builder did not owe it a common law duty of care.

Background

The Brookfield case concerned a development of a serviced apartment complex. The registered proprietor and developer of the land, Chelsea Apartments (“Chelsea”), entered into a contract with the defendant builder, Brookfield Multiplex (“Brookfield”) to construct the lots for the serviced apartment complex. Upon the registration of the plan of subdivision, title passed to the OC and the common property vested with the OC accordingly.

The OC became aware of various defects in the common property and commenced proceedings against Brookfield.

Application of the Home Building Act 1989

Section 18B of the NSW Act implies various statutory warranties into contracts to do residential work. In its original claim, the OC relied on section 18D of the NSW Act, which provides for the enforcement of those statutory warranties by entities that are not parties to a contract for residential building work. Although the OC was not a party to the contract, it had become the successor in title to Chelsea upon the registration of the plan of subdivision.

However, given that the contract related to a commercial property development, the NSW Act did not apply. This is because regulation 6 of the Home Building Regulations 2004 (“the Regulations”) excludes a “house or unit designed, constructed or adapted for commercial use as a tourist, holiday or overnight accommodation” from the definition of a “dwelling”.

The OC subsequently withdrew its claim under section 18D and acceded that it did not have the benefit of the statutory warranties under the NSW Act. It attempted instead to rely on common law principles, by arguing that Brookfield had been negligent, because it owed the OC a duty of care.

Findings

Justice MacDougall of the Supreme Court of New South Wales found in favour of Brookfield and rejected the OC’s claim that Brookfield owed it a duty of care, on the following grounds:

1. The duty of care that the OC alleges is owed to it is “novel”, and the OC is unable to point to any case establishing a duty of care of the kind alleged. Accordingly, it is inappropriate for a judge at trial level to identify and impose a novel duty of care and this issue should be dealt with by a higher court.
2. There is no room to impose a duty of care on Brookfield in circumstances where parties of equal bargaining power (i.e. Brookfield and Chelsea) have negotiated their rights and obligations. Justice MacDougall referred to the decision in Bryan v Maloney (1995) 182 CLR 609, in which it was held that such a situation:

   “would expose the builder to a liability for pure economic loss different from that which he undertook in constructing the building and would confer a corresponding right on the remote purchaser which the purchaser had not sought to acquire from the vendor”.

3. It is not the role of the Court to impose a duty of care in circumstances where it was Parliament’s intention to exclude non-residential properties from the protection of the statutory warranties.

The position in Victoria

For the purposes of whether or not an owners corporation will have recourse against a builder for defective works contained in commercial properties, section 6 of the Victorian Act excludes the following:

• any works in relation to buildings intended to be used for “business purposes”;
• any works excluded by the Domestic Building Contracts Regulations 2007. The Victorian Regulations exclude certain works carried out in relation to a subdivision of land.

Accordingly, an owners corporation in Victoria will not be able to rely on the Victorian Act for redress against building defects contained in properties not classed as “residential”. In the event that the works do fall within the ambit of the Victorian Act (and are classed as residential), the owners corporation will be afforded the protection of the implied statutory warranties in section 8 of the Victorian Act, by virtue of section 9, which enables all successive owners to enforce the statutory warranties. The Victorian Act operates similarly to its New South Wales counterpart.

Furthermore, section 68 of the Owners Corporation Act 2006 (“the OCA”) requires an “initial owner” of land affected by an owners corporation, to take reasonable steps to enforce any domestic building contract under the Victorian Act that was entered into by the initial owner. The OCA defines an initial owner as the entity that was the applicant for the registration of the plan of subdivision. Although this offers additional protections to owners corporations in relation to residential buildings against the initial owner as well as the builder, it is silent on the owners corporations’ rights against builders and initial owners for defects in commercial properties. 

The issue of whether an owners corporation in Victoria will be able to hold a builder liable in negligence by establishing a duty of care, is less clear. However, the Brookfield case is strong authority for the proposition that an owners corporation will not be able to hold a builder liable for defective building works in relation to properties used for non-residential purposes.

Lessons

The Brookfield case leaves owners corporations with limited avenues of redress against builders for defective works contained in developments for commercial purposes. Owners corporations will of course be able to rely on provisions in contracts to which they are a party to.

This article provides information that is general in nature and not a substitute for legal advice. Please contact RKL on (03) 9519 9888 if you wish to obtain legal advice for your personal situation.