Buyer Beware: The Dangers of Purchasing Property before it is Constructed
By Owen Lai, Solicitor, Lovegrove Smith & Cotton
Purchasers buying a property that is currently under construction need to be aware of any existing defects prior to settlement of the same. This goes without saying. However, a point that is not so often stressed is whether the purchasers (or subsequent owners) have given adequate consideration to any terms of settlements entered into between a vendor and a Builder. Existence of such an agreement could mean that the rights of these purchasers to claim for defective building works under the section 8 warranties in the Domestic Building and Contracts Act 1993 (“the Act”) are compromised, notwithstanding that they have standing under section 9 of the Act as a subsequent owner.
Section 9 of the Act provides that “in addition to the building owner who was a party to a domestic building contract, any person who is the owner for the time being of the building or the land in respect of which the domestic building work was carried out under the contract may take proceedings for a breach of any of the warranties listed in section 8 as if that person was a party to that contract”.
Where a vendor enters into terms of settlement with a Builder for known defective building works or defects that reasonably ought to have been known at that time, then the position at law may be that the subsequent owner cannot claim against the Builder for these defects notwithstanding section 9 of the Act.
Senior member E. Riegler in the case of Delic & ors v Yahome Pty Ltd (Domestic Building)  VCAT 752 (“the Delic case”) has aptly suggested that “although section 9 of the Act gives a subsequent owner rights commensurate with the rights of the original contracting party, it does not create rights greater than the rights of that original contracting party. Therefore, one must look at the rights of the original contracting party to determine the rights of the [subsequent owners]”.
Accordingly, if an original contracting party such as a vendor has compromised their rights to claim against the Builder for the purported defects then no recourse can be taken by a subsequent purchaser against that Builder for those defects. To interpret this any other way would be inconsistent to the rights at common law that a contracting party (such as a Builder) can compromise its rights to be free of liability with respect to those rights. Had the legislature intended to abrogate these common law rights then it could have done it with clear and express words in section 9 of the Act.
Where does that lead for subsequent owners who seek rectification of defective building works? One possible avenue is against the vendor if representations were made at the time of sale which is inconsistent with the current state of the building works. However, such avenues are limited as most prudent vendors would disclose the terms of settlement as part of their pre-disclosure requirements for the sale of land. It is then up to the subsequent owner to carry out their due diligence and the long standing legal principle of caveat emptor would apply.
Potentially though, the contract of sale between the vendor and purchaser (subsequent owner) could contain express terms that would give the subsequent owner rights against the vendor in relation to those defects.
Alternatively if the building defect is in fact a latent defect and not a known defect at the time the terms of settlement was entered into, then the warranties under the Act still apply to sustain a claim against the Builder.
The Delic Case emphasises the importance of observing terms of settlement in this context to the letter.
Unwary purchasers who enter into these sale of land contracts without legal advice as to the terms and effects of the agreement between the vendor and the Builder for defective building work, find themselves buying the property for more than what it is worth if costs to rectify building defects are taken into account.
On the flip side of the coin, the relevant Builder needs to be cognisant of all existing defects covered by the terms of settlement if the Builder seeks to rely on it as a defence to a claim by a subsequent purchaser for those defective building works. This is a complete defence and involves sound building project administration.
In the Delic case such a defence failed merely because there was insufficient evidence to satisfy the Tribunal that the claimed defects were subject to the terms of settlement. What is key though, is that the Tribunal has found in this and other cases that the subsequent owner can have no greater rights against the Builder than the first owner (vendor) has, if the vendor has compromised those rights against the Builder.
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© Lovegrove Smith & Cotton 2014