Can an Owners Corporation Sue for Defects in Common Property?
By Lovegrove Smith & Cotton
There is no denying that in the last 24 months, there has been a greater number of multi-unit residential development complexes constructed in Victoria, specifically in the metropolitan Melbourne area (i.e. within 10 km of the Melbourne CBD). The proof is simply in the number of cranes that not only surround the Melbourne CBD, but also the inner metropolitan suburbs of Carlton, Brunswick, Collingwood and Richmond.
Whilst it is hoped that all of these residential apartment complexes will be free of any defects after they are built, the reality is that corners will be cut or innocent mistakes will be made somewhere during the course of the works. Unfortunately, in many cases, these mistakes inevitably lead to defects manifesting in the works at a later time.
When a multi-unit residential development is completed, the land is subdivided into individual lots and common property under a strata scheme. Individual lots are owned exclusively by individual lot owners, whilst common property is collectively owned by all the lot owners. However, importantly, the legal title to the common property is vested in an Owners Corporation, which is a separate corporate body comprising and representing all the lot owners.
Often confusion arises between individual lot owners particularly if latent building defects are found in areas where there is uncertainty as to whether the areas belong to common property or to an individual lot.
Purchasers of residential property in Victoria are afforded significant protections against building defects pursuant to the statutory warranties contained in the Domestic Building Contracts Act 1995 (“the Act”). This is because under the Act, a “building owner” can bring a claim in relation to defective domestic building work. Therefore, pursuant to the Act individual lot owners can sue the builder for defects contained in individual lots.
However, the Act is not so clear on whether an Owners Corporation can sue the builder for defects in common property. This is because the term “building owner” is not defined by the Act, and at first glance it is uncertain whether an Owners Corporation is considered the “building owner” of the common property.
The Owners Corporations Act 2006 (“the OC Act”) further confuses the situation as section 68 of the OC Act requires an “initial owner” of land affected by an Owners Corporation, to take reasonable steps to enforce any domestic building contract under the Act that was entered into by the initial owner, including in relation to defective building work in common property.
Fortunately, this issue was resolved in the Victorian Supreme Court case of Body Corporate No 1/PS40911511E St James Apartments v Renaissance Assets Pty Ltd  VSC 438. In that case, the Supreme Court held that the Owners Corporation, being the registered proprietor of the common property, was the “building owners” for the purposes of the Act and had standing to bring a claim against the builder for defects in the common property.
Despite that, an Owners Corporation in Victoria will not be able to rely on the Act for redress against building defects contained in properties not classified as “residential”. An Owners Corporation will not have recourse against a builder for defective works in relation to buildings intended to be used for “business purposes”. This is particularly important to note for Owners Corporations of mixed use apartment complexes, where there are commercial premises on the lower levels and residential apartments on the higher levels of the building.
Nevertheless, the take home message for now is that if the works fall within the ambit of the Act (and are classed as residential) as regards common property, the Owners Corporation will be afforded the protection of the implied statutory warranties in section 8 of the Act, by virtue of section 9, which enables all successive owners to enforce the statutory warranties. But before an Owners Corporation issues proceedings, it needs to note that pursuant to section 18 of the OC Act, it must be authorised to do so by a special resolution of the individual lot owners.
If you are an Owners Corporation considering issuing legal proceedings against a builder for defects in common property, we suggest that you seek legal advice from a construction lawyer with knowledge of these areas before you issue proceedings.
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© Lovegrove Smith & Cotton 2014