Many strata schemes now involve the conversion of existing warehouses into residential dwellings and the renovations of old structures for a “Chic” modern look. If you find yourself in this situation, you would be interested in a recent judgement by the New South Wales Court of Appeal, which is pertinent to your circumstance.

On 16 November 2012, the Court of Appeal, in effect, confirmed the decision of the Consumer, Trader and Tenancy Tribunal that a builder must be proven to have done work before any liability arises (Building Insurers Guarantee Corporation v The Owners – Strata Plan No. 60848 [2012] NSWCA 375). Some background about the facts of this case is necessary for the purposes of understanding the effect of this judgement.

On 10 September 1997, approval was given for the conversion of an old building into a residential strata development. The conversion involved internal works, except for the installation of some windows to the outer brick walls of the Building. In the course of installing the windows, the Builder brought to the Developer’s attention the inadequacy of the outer brick walls to prevent moisture penetration and the deficiencies in the waterproofing of those walls. The Builder was instructed to ignore the deficiency, to retain all exterior walls and to not build any exterior wall. The Builder followed the instructions given by the Developer, but did not go so far as to confirm those instructions in writing. There was no written contract between the Builder and the Developer for the works. The works were carried out on a “do-and-charge” basis. The Builder did obtain Home Owners Warranty Insurance for the works.

When the Builder went into liquidation, the Owners Corporation made a claim for indemnity under the Home Owners Warranty Insurance Policy, which was issued by FAI and administered by the Building Insurers Guarantee Corporation (BIG Corp). The claim encompassed a number of defects, including water penetration and deficient waterproofing. BIG Corp denied cover for this defect on the basis that this work did not form part of the contract works which the Builder (who was the Insured) was to perform. As such, the Owners Corporation is not entitled to indemnity under the Policy for such works.
Consumer, Trader and Tenancy Tribunal Proceedings

The Owners Corporation lodged an appeal to the Tribunal, relying on its assertion that the works had been carried out in breach of the Statutory Warranties implied by Section 18B of the Home Building Act 1989(NSW). One of the Statutory Warranties include a warranty that if the work consists of the construction of a dwelling, the making of alterations or additions to a dwelling or the repairing, renovation, decoration or protective treatment of a dwelling, the work will result, to the extent of the work conducted, in a dwelling that is reasonably fit for occupation as a dwelling…”.The Tribunal found in favour of BIG Corp on this point. In the course of its decision, the Tribunal held that“…there was no contractual obligation to carry out any work to apply a waterproofing membrane to the exterior of the building. Thus, the lack of such a membrane is not a breach of contract by the builder…

The final aspect to consider is the obligation of a builder to construct so that the works are reasonably fit for occupation as a dwelling…I shall assume that the building is not so fit. The answer is simply that to take such steps was beyond the contract of the builder. The warranty does not come into play.”
In other words, the Tribunal held that the Statutory Warranties would apply to only the works the subject of the Building Contract. A Builder would not be required to perform any work to rectify an existing defect in the Building if such work does not fall within the scope of the works it is required to carry out under the Contract. This is the case even where the Builder becomes aware of the existence of the defect in the course of the works. It follows that a successor in title, such as an Owners Corporation, will not have the protection of the Statutory Warranties in respect of such defect(s).

District Court Decision
The Owners Corporation sought to appeal this decision in the District Court and that Court found in favour of the Owners Corporation. The judge held that the obligation on the Builder was to make the premises waterproof.

Court of Appeal
BIG Corp appealed against the District Court’s decision to the Court of Appeal. BIG Corp’s appeal was successful as the appellate Court, in effect, agreed with the Tribunal’s view. The decision of the District Court was set aside and the matter remitted to the District Court for a determination according to law.
Implications for Owners Corporations

The key implication of this decision for an Owners Corporation who finds itself in a similar circumstance is that the Owners Corporation cannot simply assume that it would be able to rely on the Statutory Warranties in respect of all defects affecting the common property.

This judgement confirms that the benefit of the Statutory Warranties is confined to only the defects arising out of works which the Builder was contracted to perform, and not more.

Further, this case emphasises the importance of undertaking careful investigations prior to the commencement of any action, where such investigations must include a determination of the scope of works of a Building Contract.