Home Building Act update: No duty of care owed by builders and developers when statutory warranties apply

Brendan Hoffman, Partner, Sydney
Herjit Saini, Law Clerk, Sydney

Following the recent Supreme Court decision of Owners Corporation Strata Plan 72535 v Brookfield[1], builders and developers do not owe a common law duty of care to owners corporations, or it would appear other successors in title, in circumstances where there is an alleged breach of the statutory warranties implied by the Home Building Act 1989 (NSW) (Act).

Further, the Court held that whether a particular contract is a contract to do ‘residential building work’ within the meaning of the Act will be determined by considering the subject matter of the contract at the time the contract was entered into and the subsequent use of the building does not affect this assessment.

Background

The Owners Corporation SP 72535 (the Owners) for the apartments known as ‘Star of the Sea’ in Terrigal brought proceedings against the builder and developer of the development, being Brookfield and Hiltan respectively.  Hiltan and Brookfield had entered into a design and construct contract (D&C Contract) for Brookfield to design and construct the apartments.

The development compromised 52 residential lots and a separate manager’s residence.  At the time of the proceedings, the majority of the residential lots were rented for holiday accommodation and only three of the residential lots were permanently occupied by their owners.

The Owners alleged that there were defects in the apartments and claimed that Brookfield and Hiltan had breached both the statutory warranties implied by       s18B of the Act and their common law duty of care to the Owners. The Owners sought damages for alleged breach of contractual and common law duties.

McDougall J initially determined two key legal issues prior to considering the extent of the defects and appropriate rectification costs, being:

1.     Did the builder and developer owe the Owners a common law duty of care?

2.     Were the works ‘residential building works’ within the meaning of the Act?

Did Brookfield or Hiltan owe the Owners a duty of care?

The Court held that neither Brookfield nor Hiltan owed The Owners a common law duty of care. The Owners relied on the decision of the Court of Appeal of New Zealand in Mount Albert Borough Council v Johnson [2] to support their claim against Hiltan that residential or commercial developers owe a non-delegable duty to a subsequent owner to ensure that proper care and skill is taken by the builder or designer.

McDougall J rejected the Owners’ submissions and concluded that Brookfield and Hiltan do not owe a common law duty of care to the Owners for the following reasons:

  •   the Owners had the benefit of the statutory warranties and there was no 

  reason to hold that some additional common law duty of care should   
  be imposed over the protections that the legislature considered appropriate
  and; 

  •   there was a detailed contract negotiated between Brookfield and Hiltan, who 

  appeared to be on equal footing meaning Brookfield did not owe 
  Hiltan a common law duty of care in respect of the original contract.

Do the Owners have the benefit of statutory warranties implied under the Act?

Brookfield argued that the development was ‘adapted for commercial use as tourist, holiday or overnight accommodation’ and was therefore excluded from the definition of ‘residential building works’ under the Act.  In support of this position, Brookfield submitted that:

  •   the residential lots had been available for letting to holiday makers since the

  date of practical completion; and

  •   the present adaption of the development was something that had always been

  planned or proposed and thus something for which the development had
  always been designed and constructed. 

However, McDougall J found the development was ‘residential building work’ that had the benefit of the statutory warranties, on the basis that:

1.     the development was marketed not as a resort for the use of         
        holiday-makers, but as a residential apartment complex that had
        features associated with an up-market holiday resort;

2.     the wording of the Act suggests that the proposed structure at the time the 
        contract is made is the relevant consideration (ie. the use of the word ‘will’
        in s18B of the Act); and

3.     statutory warranties provided by the Act cannot vary from time to time and 
        so, if it is to be accepted that there has been an ‘adaption’ to the common
        property, it would mean that the statutory warranties vary according to the 
        use at particular times.

Therefore McDougall J concluded that the D&C contract was for ‘residential building work’ and the warranties set out in s18B of the Act were implied into the contract when it was made.  Consequently, the Owners were entitled to the benefit of the statutory warranties under the Act against Brookfield and Hiltan.

Implications

The decision will have the following practical implications: 

  • the purposes for the works, and whether the works are ‘residential building 

work’, will be determined at the time the contract is entered into; and

  • statutory warranties may be implied by the Act even when a development has

been adapted for commercial use and is no longer predominately residential.

Importantly, it also now appears neither a builder nor developer will owe a common law duty of care in negligence to successors in title when statutory warranties are implied by the Act.  This will confine the number of claims for negligence against builders and developers. [1] (2012) NSWSC 712 [2] (1979) 2 NZLR 234.