On 8 October 2014, the High Court of Australia delivered its long awaited decision in Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288  HCA 36. In doing so, the High Court ruled on the question as to whether a builder of a strata-titled serviced apartment complex owed an owners corporation a duty of care to avoid causing the owners corporation economic loss of the cost of repairing latent defects in the property.
The High Court overturned the decision of the NSW Court of Appeal which had found in favour of the owners corporation. There were four separate judgments written by the seven judges who heard the case and, while there were variations in the four judgments, the Court unanimously decided that the builder did not owe the owners corporation in this case a duty of care.
This meant that the owners corporation’s claim against the builder to recover compensation for the cost of rectifying the defects failed.
The decision and the reasons of the High Court have implications for owners corporations,principally for commercial schemes but also for residential strata schemes.
What was the case about?
The case concerned the lower 9 floors of an apartment complex in Chatswood, Chelsea Apartments, which was operated as a serviced apartment hotel. It was built by Brookfield Multiplex Ltd (Brookfield) for the developer, Chelsea Apartments Pty Limited (Chelsea).
Chelsea is owned as to 40% by a Brookfield subsidiary.
As part of the pre-construction contractual arrangements, there was a Deed of Master Agreement between Chelsea and Stockland Trust Group under which the apartments were to be leased to a subsidiary of Stockland, Park Hotel Management Pty Ltd (Park Hotel). Park Hotel was to run the serviced apartment hotel under the “Holiday Inn” brand.
In order to bring investors into this development, the hotel was structured as a strata scheme. The lease arrangements between Chelsea and Park Hotel were such that Park Hotel acquired all of Chelsea’s rights to direct the operation of the owners corporation.
When the individual purchasers of the apartments acquired their lots, they did so knowing the terms of the lease arrangements to which they became bound. Those arrangements required the individual owners to give up their voting rights in the owners corporation to Park Hotel who became, in effect, their permanent proxy.
Defects that might be found in the construction of the building were to be dealt with in three ways:
- The design and construct contract between Brookfield and Chelsea provided for a defects liability period of 52 weeks except for latent defects which would not have been disclosed upon reasonable inspection at the time of the completion of the building;
- The individual sale contracts between Chelsea and the lot owners required Chelsea to repair defects or faults in the common property of which written notice was given to Chelsea within 7 months of registration of the strata plan; and
- The individual purchasers had separate rights under their sales contracts to give notice in respect of structural defects or defects which required urgent attention or might cause danger to persons in the property or made the property uninhabitable.
Some time after those time periods had elapsed, the owners corporation identified defects in the common property which it alleged resulted from the original construction of the building. The statutory warranties under the Home Building Act were not available to the owners corporation because it was a commercial, rather than a residential, strata scheme.
The owners corporation claimed in the Supreme Court of NSW against the builder for its economic loss in rectifying the alleged defects. The action was based upon a claim in negligence. For a claim in negligence to succeed, the owners corporation had to establish that the builder owed it a duty of care.
The Supreme Court found against the owners corporation who then appealed to the Court of Appeal. In a unanimous decision, the Court of Appeal found that the builder owed the owners corporation a duty of care, confined to a limited category of latent defects. Brookfield appealed to the High Court. The owners corporation also cross-appealed, arguing that the extent of the duty of care was not limited by the categories of defects imposed by the Court of Appeal.
The High Court granted Brookfield’s appeal and dismissed the owners corporation’s cross-appeal.
What the High Court Decided
The complex contractual matrix described above formed the background to the High Court’s deliberation as to whether or not individual owners and the owners corporation were vulnerable to the alleged negligence of the builder. The issue of vulnerability is fundamental in determining whether or not a duty of care was owed by Brookfield to individual owners and the owners corporation.
The Court determined that the purchasers of lots from Chelsea were “effectively investors in a hotel venture under standard form contracts which … contained specific provisions relating to the construction of the building and Chelsea’s obligations to undertake repairs”. Neither Chelsea (the developer and original owner) nor the individual lot owners who purchased their lots from Chelsea could be regarded as vulnerable so that Brookfield did not owe a duty of care to either of them over and above the contractual responsibilities.
The characterisation of the lot owners as investors in the hotel venture is in contradistinction to the position in the 1995 decision of the High Court in Bryan v Maloney (1995) 182 CLR 609. That case involved a residential home owner who contracted with a builder to build a home. The High Court in Brookfield Multiplex described the contract in Bryan v Maloney as non-detailed andcontaining no exclusions or limitations on liability and a subsequent purchaser from that owner as being assumed to be “unskilled in building matters and inexperienced in the niceties of real property and investment”.
Importantly, the High Court did not overrule Bryan v Maloney so that, in cases where analogous facts to those pertaining in Bryan v Maloney can be established (non-detailed construction contract with no exclusions or limitations on liability, subsequent purchasers unsophisticated in building matters and inexperienced in real property and investment), the requisite duty of care can be established.
In summary, the decision raises the following principles and issues:
- The High Court did not rule out a duty of care ever being owed by a builder to a subsequent owner. However, establishing that a duty of care is owed by a builder to an owners corporation or subsequent owner of a lot in a strata scheme may be difficult, more so in relation to commercial strata schemes.
- Whether a duty of care is owed will require careful consideration of the contractual matrix surrounding the construction of the building and the purchase of the lots in the building, in respect of:
- the responsibilities assumed by the builder under the building contract; and
- the ability of the developer and the subsequent purchaser to protect themselves by way of negotiating terms in the purchase contract
- If the original purchase contract from the developer provides remedies to have defects fixed or regulates the quality of the work, it is unlikely that a duty of care will found by a Court to be owed by the builder to a subsequent owner.
- Depending on the content of those contracts, it may be the case that subsequent owners may not be able to establish the requisite “vulnerability” to the economic consequences of the defects.
- If the individual lot owners are not “vulnerable”, then it follows that the owners corporation, as “agent” of the individual owners, will also not be “vulnerable” and therefore not have a right of action against the builder in negligence.
- Current legal proceedings by owners and owners corporations which are based upon or include claims in negligence need to be reconsidered in the light of this decision. Specific legal advice in relation to the particular circumstances should be obtained.
- Purchasers of lots in strata complexes will need to be properly advised in relation to the risk which they may be accepting in entering into a particular purchase contract. Advisors to such purchasers, including conveyancers and lawyers, will need to be alive to such risks. In circumstances where purchasers do not have the protection of Home Owners Warranty Insurance, limited or no access to the statutory warranties under the Home Building Act, and now arguably no claim based on negligence, the risk that they will be exposed to significant expense in rectifying defects is very real.
Where to from here?
The need for legislative reform in this area has never been more important.
In circumstances where the individual owners in Chelsea Apartments were faced with:
- a standard form contract that would not have been susceptible of any amendment by them; and
- the abrogation of their rights to vote by the terms of the leases of their lots to Park Hotel,
it is difficult to imagine a scenario in which purchasers of lots in commercial developments will ever have the requisite “vulnerability” to establish a duty of care by the builder to those owners.
As a result, commercial strata schemes have almost no legal protection from shoddy building work in the construction of their building.
Residential strata schemes, whilst having the benefit of the statutory warranties under Part 2C of the Home Building Act, are also faced with the erosion of their rights. Proposed changes to the Home Building Act are slated to commence on 1 December 2014. As a consequence of those changes residential strata schemes will be forced to take action, and to take action early, or risk the extinguishment of their rights. An alternative action in negligence will depend upon satisfying the tests in Bryan v Maloney, which in most large strata schemes is now very unlikely.
The accountability of builders to subsequent owners is important, in our view, in promoting the quality of construction. Absent reasonable safeguards and protections, purchasers of home units in strata schemes may not be prepared to accept the risk of that investment and the exposure to the risk of the cost of rectifying defects.
The power of purchasers to negotiate price and non-price terms to obtain protection, certainly in the present property climate, is more illusory than it is real. That leaves those prospective purchasers with the only real alternative (suggested by Crennan, Bell and Keane JJ in Brookfield Multiplex) being to take their capital and invest it elsewhere.
His Honour Gageler J noted that if protection is to be afforded to all purchasers of lots in strata schemes, then “it is best done by legislative extension of those statutory forms of protection”.
On that basis, owners corporations and lot owners should write to their local members of Parliament and express their concern and alarm at the sudden and dramatic erosion of consumer protection,for owners coproations and lot owners.This diminution of consumer protection is also detrimental to the housing industry.