October 2016

Building defects issues for trustees. Buying a house for a beneficiary in NSW.

What do you need to know as a trustee buying a house for a beneficiary?

A property purchased for a beneficiary who turns out to have a leaking roof and cracked walls can result in a lot of time spent and anxiety for a trustee. Attempting to resolve these issues and properly discharge its duties pursuant to the trust document, can cause additional expense for the beneficiary. The process can be made all the more difficult because the trustee does not reside in the property, or experience the issues within the property first hand.

The problem is that quite often, what you see is not what you get, if there are hidden defects in the construction of the home.

If defects are identified, will the developer or the builder or both be liable for the rectification of those defects?

The following summary, drafted to assist in the process of buying a property for a beneficiary, provides an outline of:

  • pre-purchase considerations;

  • investigating and identifying defects;

  • who is liable for rectification; and

  • what action can be taken, and when.

Please note that this summary does not apply to strata title properties, and assumes that the trustee has power to purchase the property under the trust instrument, and it is a prudent investment.

Before purchasing a property

Prior to exchanging contracts to purchase a residential property (within the cooling off period at the latest) a pre-purchase inspection report by a building consultant, preferably an experienced qualified builder, should be obtained.  

The report must:

  • adopt the Australian Standard for pre-purchase building inspection reports;

  • make the trustee aware of the nature and extent of any problems; and

  • indicate how the problems will affect the property in the long term.

The trustee can then decide whether to proceed with the purchase, or negotiate a lower purchase price to reflect the cost of rectification of the defects. 

Tip – If the house was built, or alterations and additions were constructed less than six years ago, make sure there is a home warranty insurance certificate in the contract.

Tip - If the report identifies defects requiring rectification, the trustee will not be able to make a claim for the identified defects against the builder or developer after the purchase.

What if defects appear after the purchase?

Statutory warranties about defects

A builder who undertakes residential building work (and any developer for whom the work was done) gives to the owner of the property (and to those who later purchase the property from the original owner) the warranties set out in s18B of the Home Building Act 1989 (NSW).  The warranties are implied in all building contracts for residential building work and cannot be excluded.

The principal warranties are:

  • that the work will be performed with due care and skill;

  • that the work will be carried out in accordance with the plans and specifications set out in the contract; and

  • that the work will be done in accordance with, and will comply with law.

Provided that it can be shown that:

  • the defect is the result of the breach of one of the warranties above;

  • the trustee was unaware of the defect when the property was purchased;

  • the warranty hasn’t already been enforced in relation to the defect; and

  • the house was built or the alterations and additions were constructed less than six years ago;

the builder or developer may be ordered to rectify the defect, or to pay the cost of rectification.

Building consultant

The first step after a defect is discovered is to engage a building consultant to attend and inspect the property, and if the consultant confirms the existence of a defect, to prepare a report which identifies the defect, states why it is a defect, states the appropriate method of rectification and estimates the cost of rectification. 

What do I do once the defects have been identified?

Notify the insurer

Prior to July 2010 private insurers, and since then the Home Building Compensation Fund (the Fund), provide a form of insurance for owners where the builder has breached the statutory warranties, but the builder is insolvent, has disappeared or is dead.  This insurance has to be obtained by the builder for the benefit of the builder’s client and later owners.

The maximum payable by the Fund is presently $340,000.00. 

As soon as defects are identified to be a breach of the statutory warranties, the insurer or the Fund should be notified of any potential claim, even if at that point the builder is still operating.  The insurer or Fund should also be told if the nature and number of the defects, and the size of the potential claim change.

Tip - Since 15 January 2015, owner-builders have not been required to obtain insurance from the Fund.  Instead each sub-contractor to an owner-builder is required to provide insurance for its work, which can make claims complicated.

Demand

Initially, a letter of demand enclosing the expert report should be sent to the builder and developer, identifying the defects and the cost of rectification, and allowing a period in which the rectification should be carried out, or the reasonable costs of the rectification paid. 

Fair Trading

If negotiations with the builder or developer don’t succeed, the next step is to contact the Office of Fair Trading.  Fair Trading should be notified of a complaint in writing.  Fair Trading will then arrange for a Fair Trading officer to inspect the property, and attempt to negotiate a suitable outcome. 

After inspecting the property, Fair Trading may issue a rectification order to the builder.

If a rectification order is not complied with, or the trustee is not satisfied with the order, the trustee can lodge a claim at NCAT or the court.

Tip – Check that the trust deed gives you authority to take this first step.

Claims in NCAT or State Courts

NCAT can hear claims for up to $500,000 in value.  The District Court can hear claims from $500,000 to $750,000.  The Supreme Court hears claims above $750,000.

Courts, and particularly NCAT, will usually first make orders for the rectification of the defects by the builder or developer responsible, and will only order the builder or developer to pay the cost of rectification if the rectification work order is breached.

Limitation Periods – how long do I have?

If the contract to do the work was entered after 1 February 2012, you have six years from the date of completion of the work, if the defect is a major defect, or two years in any other case, to start proceedings.  For contracts entered before 1 February 2012 the period is seven years for all defects.

A major defect is defined as a defect in a major element of the dwelling that causes or is likely to cause an inability to inhabit or use the dwelling, or may lead to the destruction or collapse of the dwelling (or part of it).

The limitation period starts from the date of completion of the work. 

Author: Vivien Botsikas