In Owners Corporation Strata Plan 61288 v Brookfield Multiplex [2012] NSWSC 1219 the Supreme Court has limited the ability of an Owners Corporation of a Strata Plan to hold a developer or builder liable for rectification of defects within the common property of that strata plan if the strata plan comprises serviced apartments.

In his decision, McDougall J made reference to his recent decision in the Star of the Sea case which has been the subject of a previous update on our website.  Readers may recall the Star of the Sea case involved residential apartments, some of which were used as holiday rentals, but which at the time of construction were intended for normal residential usage.  The developer submitted that the Owners could not claim the protection of statutory warranties found in s.18B of the Home Building Act 1989 (NSW) (“HBA“).  In finding for the Owners on that point, the Supreme Court found that it was the intention of the parties at the time the contract was signed for construction that was important.  As the units had been intended to be used for residential purposes at the time the construction contract was signed, despite the subsequent use of the units, the Owners retained the benefit of the HBA warranties.

The present case concerned part of a building that was specifically designed and constructed to be only serviced apartments that were intended to be rented out for commercial gain.  The Owners never enjoyed the benefit of the statutory warranties under the HBA.

In Star of the Sea, His Honour expressed a reluctance to extend a duty of care for the reason that parliament had set up a statutory scheme of warranties.  This decision expands upon this reasoning.  His Honour :

1. Noted the case of Bryan v Maloney does not support the imposition of a duty of care in the circumstances and cited the dissenting judgment of Brennan J who said: It would be anomalous to have claims relating to the condition of the building by an original owner against the builder determined by the law of contract if the relief claimed by the remote purchaser against the builder would be determined by the law of tort. 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; and
2. Stated that where a contract between the original owner and developer was negotiated at arms length ‘[t]here is neither reason nor room for the imposition of a duty of care…[w]here the parties have negotiated in full their rights and obligations, there is no reason for the law to intervene by imposing some general law duty of care’.  If there was no duty between the developer, builder and original owner, the Court will be slow to find a subsequent duty owed by the developer or builder to a subsequent owner.

While His Honour left room for the question to be considered by a higher authority, this case leaves Owners Corporations that are substantially comprised of serviced apartments carrying all the risk of the defective work of a builder who was not engaged by the Owners Corporation.  This is striking in light of the absolute obligation imposed on the Owners to repair and maintain common property under s.62 of the Strata Schemes Management Act 1996 (NSW).