Home owners, including Owners Corporations of strata plans have seen a steady erosion of rights surrounding residential defects over the past decade.  With first resort insurance replaced with last-resort insurance and the most recent amendments to the Home Building Act 1989 (NSW) (“HBA“) further narrowing the rights of owners, and insurers seeking to exercise a subrogated right of recovery under a policy of home warranty insurance where a  claim has been paid.

It has been common for owners to plead claims for defective work both as a breach of the  implied warranties at section 18B of the HBA and as negligence on the part of both the builder and developer.  In the recent decision of The Owners Strata Plan No 72535 v Brookfield [2012] NSWSC 712 the Supreme Court found that the developer and builder did not owe a duty of care in negligence to the owners.  This left the owners with a claim only for a breach of statutory warranties against the builder and the developer.

It is worth noting that  negligence is often pleaded due to limitations issues which arise in cases involving breaches of statutory warranties as owners may only sue to recover damages for defects within strict time limits set out in section 18E of the HBA (2 years for non-structural defects and 6 years for structural defects).  Time begins to run  from completion of the work under HBA.  However, under section 14 of the Limitations Act 1969 (NSW),  time begins to run in respect of the negligence claim when the owners were aware, or ought reasonably to have been aware, of the negligence.  As residential defects can take time to manifest and be subject to lengthy time for investigation, this decision underscores the importance of owners taking firm action early to preserve their rights against a builder or developer.

Facts

The owners in the Brookfield case were the Owners Corporation of the “Star of the Sea” development in Terrigal, of which Brookfield was the developer and the second defendant, Hitan, was the builder.

The situation faced by the Owners Corporation was not uncommon or unusual, being that defects had arisen within the building after completion and the claim was pleaded as both a breach of the HBA and as a claim in negligence.

Brookfield defended the claim on two main grounds (with the builder adopting Brookfield’s position):

1. The building was partially used as a resort, and as such it was not a “dwelling” within the meaning of Regulation 6(f) the Home Building Regulation 2004 (NSW) (“Regulations“); and
2. It did not owe any duty of care to the owners corporation.

Is a strata plan used for letting purposes a “dwelling”?

Clause 6(f) of the Regulations provides that a house or unit that has been adapted for letting is not a dwelling under the HBA.  Brookfield submitted that the use of the building as a resort deprived the owners of any rights under the HBA.  The Supreme Court disagreed, finding that:

1. Brookfield and Hitan had already admitted that the work was residential in nature and the original design and construction contract, to which Brookfield was a party, specifically referred to residential construction work; and
2. The question of whether a building is a “dwelling” or not is to be answered by looking at the contract for construction of the building at the time it is entered into, not later.

The development was intended to be for residential use, and the subsequent use as a resort did not cause the Owners Corporation to lose the benefit of the statutory warranties under the HBA

Negligence

His Honour Justice McDougall commenced the part of his judgment dealing with negligence by noting that the issue of a duty of care ‘is one for consideration either at the final appeal level or by the legislature’ and rejected the claim that the developer and builder owed a duty of care to the Owners Corporation above the statutory warranties provided in the HBA.

The High Court decision of Bryan v Maloney (1995) 182 CLR 609, which found that a duty of care arose from a builder to a subsequent owner where there was sufficient proximity, was distinguished on a number of grounds.

In Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 216 CLR 515 commercial premises were found to be outside the formulation of Bryan v Maloney and a requirement of ‘vulnerability’ was introduced in Perre v Apand Pty Limited(1999) 198 CLR 180 and applied in Woolcock.  The Owners Corporations submission that it met the updated Bryan v Maloney test was rejected.

His Honour reasoned that the existence of a statutory scheme of warranties meant:

where the legislature has considered, and made clear provision for, the extent to which a builder is liable to a subsequent owner, I think that the courts should be slow to substitute their own judgment for that of the legislature

In addition to this, His Honour noted that the issue of proximity was no longer a part of the law as it related to this case, and finally that Brookfield could not have been said to owe a duty of care to Hitan as their relationship was regulated by a lengthy contract negotiated between parties on equal terms.  Such a duty would, according to His Honour, need to be present before Brookfield could owe a similar duty to the Owners Corporation.

The decision is one that all Strata Managers and Executive Committee members should consider if a building under their care suffers from defects and recourse may be available to pursue a builder and/or developer.  Greater care than ever before needs to be given to the limitation periods under the HBA.