Test­ing the water — does a builder owe a duty of care to an Own­ers Corporation?

In Brief

In an impor­tant deci­sion which has ram­i­fi­ca­tions for Own­ers Cor­po­ra­tions, the High Court has recent­ly held that a builder did not owe a duty of care to an Own­ers Cor­po­ra­tion to avoid caus­ing it to suf­fer eco­nom­ic loss from latent defects in com­mon property. 

The Facts

Brook­field Mul­ti­plex Ltd v Own­ers Cor­po­ra­tion Stra­ta Plan 61288 [2014] HCA 36
Chelsea Devel­op­ments Pty Ltd (Chelsea) engaged Brook­field Mul­ti­plex (Brook­field) to con­struct a mixed res­i­den­tial, retail and ser­viced apart­ment com­plex in Chatswood, NSW (Com­plex)^1. Chelsea leased the ser­viced apart­ments to Park Hotel Man­age­ment Pty Ltd, a sub­sidiary of Stock­land Trust Group, who car­ried on the ser­viced apart­ments under the Hol­i­day Inn brand. The case before the High Court con­cerned the Own­ers Cor­po­ra­tion of the ser­viced apart­ment sec­tion of the Com­plex².

The Own­ers Cor­po­ra­tion com­menced pro­ceed­ings against Brook­field, claim­ing that Brook­field was respon­si­ble for loss the Own­ers Cor­po­ra­tion suf­fered due to latent defects in com­mon prop­er­ty. The claim was made on the basis that Brook­field owed the Own­ers Cor­po­ra­tion a duty of care in neg­li­gence. The High Court found that there was no duty of care. In deter­min­ing this, the High Court con­sid­ered whether any duty owed by Brook­field to the Own­ers Cor­po­ra­tion was a con­se­quence of a duty of care owed to Chelsea, or to sub­se­quent pur­chasers. The High Court also con­sid­ered whether Brook­field owed the Own­ers Cor­po­ra­tion a duty of care inde­pen­dent­ly of a duty of care to Chelsea, or sub­se­quent pur­chasers³.

The High Court found that because of the nature of the con­tracts Chelsea and the sub­se­quent pur­chasers entered into, which includ­ed claus­es regard­ing lia­bil­i­ty for defects and defect rec­ti­fi­ca­tion, Chelsea and the sub­se­quent own­ers were not ​“vul­ner­a­ble”, and there­fore there was no duty of care to Chelsea and the sub­se­quent own­ers, and no duty of care could be owed to the Own­ers Cor­po­ra­tion as the statu­to­ry agent⁴. The High Court also found that, in this case, the fact that the Own­ers Cor­po­ra­tion did not exist at the time of the alleged defects⁵, that the Own­ers Cor­po­ra­tion did not pay for the com­mon prop­er­ty⁶, and that any loss suf­fered by the Own­ers Cor­po­ra­tion, inde­pen­dent of the lot own­ers, could not be found⁷, were all fac­tors which went against the High Court find­ing a duty of care as assert­ed by the Own­ers Cor­po­ra­tion⁸.

Although this case was decid­ed on its own facts, this deci­sion is a note that Own­ers Cor­po­ra­tions should con­sid­er the con­tracts entered into by the own­ers with the builder, or with a pre­vi­ous own­er, and check the posi­tion with respect to defect lia­bil­i­ty before embark­ing on a claim against a builder. It also applies to builders, devel­op­ers, and pur­chasers to ensure that their con­tracts pro­vide suf­fi­cient pro­tec­tion against lia­bil­i­ty for defect rec­ti­fi­ca­tion. This deci­sion also rais­es a ques­tion about whether the statu­to­ry reme­dies pro­vid­ed for in the Com­pe­ti­tion and Con­sumer Act 2010 (Cth) pro­vide more expan­sive redress for con­sumers than the reme­dies offered in prop­er­ty leg­is­la­tion in NSW. 

Stra­ta Title Reform

As well as keep­ing the effect of this High Court deci­sion in mind, builders, devel­op­ers and Own­ers Cor­po­ra­tions should also be aware of pro­posed reforms to stra­ta schemes and com­mu­ni­ty schemes leg­is­la­tion. There have been con­sul­ta­tions with respect to pro­posed reforms, and although these have not yet come into effect, for devel­op­ers, they may include such things as the removal of devel­op­ers’ rights to vote on mat­ters con­cern­ing build­ing defects at meet­ings, a require­ment that builders/​developers pro­vide a main­te­nance sched­ule to the own­ers, and a require­ment that a devel­op­er of a high-rise stra­ta devel­op­ment pay a bond which is return­able when defects iden­ti­fied by an inde­pen­dent defects inspec­tor have been rectified. 

Amend­ments to the Home Build­ing Act 1989 (NSW)

On 5 June 2014 passed the Home Build­ing Amend­ment Act 2014 (NSW). While the com­mence­ment date has not been announced, this leg­is­la­tion brings changes of which both builders and own­ers should be aware. For exam­ple, with respect to defect noti­fi­ca­tion and rec­ti­fi­ca­tion, a par­ty who has the ben­e­fit of a statu­to­ry war­ran­ty now has a duty to mit­i­gate their loss, noti­fy the per­son who is respon­si­ble for the breach with­in 6 months of when they iden­ti­fy the breach or of when they should have rea­son­ably become aware of the breach, and allow that per­son access to the prop­er­ty to rec­ti­fy the breach. It is also worth not­ing, that any fail­ure to com­ply with these duties can be tak­en into account by a court or tri­bunal. The oth­er mat­ter with respect to defects is that courts and tri­bunals are now to regard an order for rec­ti­fi­ca­tion of defec­tive work as a pre­ferred remedy. 

The devel­op­ments out­lined above are just a sam­ple of some of the changes that are hap­pen­ing in stra­ta and home build­ing space which build­ing indus­try par­tic­i­pants should keep on top of.