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Strata property investors beware!!! The builder's duty of care has reduced in the wake of the recent Brookfield case

Property Law News | October 2014

In Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 [2014] HCA 36, Brookfield was engaged by Chelsea Apartments (the developer) to build a multi-storey retail, restaurant, residential and serviced apartment complex at Chatswood.

The design and construct contract between Brookfield and the developer contained detailed provisions with respect to the quality of the work to be performed by Brookfield and required Brookfield to remedy defects or omissions in the work within a clearly defined defects liability period. The standard form contract of sale which was issued by the developer to purchasers (investors) in the serviced apartment complex gave the purchaser specific contractual rights in relation to defects in the property, including the Common Property and most importantly required the developer to rectify defects that were brought to its attention within a specified time period after the date of registration of the strata plan.

The Owners Corporation [the "OC"] commenced proceedings in the Supreme Court of NSW to recover damages including the cost of repairing latent defects in the Common Property of the building. The OC claimed that Brookfield was liable in negligence for a breach of a duty to take reasonable care to avoid a reasonably foreseeable economic loss to the OC for having to make good latent defects which came about due to the building's defective design and/or construction. The primary judge held that no such duty of care was owed by the builder to the OC which decision was overturned by the Court of Appeal of the Supreme Court of NSW. On appeal to the High Court the court unanimously held that:

  1. Brookfield owed a duty of care to the developer which was expressly set out in detail in the terms of the design and construct contract. As the OC did not come into existence until after the construction was completed [after the completion of the building and the registration of the strata plan and the expiry of the "initial period"] it could not therefore rely on that duty of care on the terms in the contract;
  2. The court also stated that as the OC acquires the Common Property in a strata scheme without any outlay on its part then then it is impossible to see that the OC had suffered any loss by reason of the quality of the Common Property which had been vested in it;
  3. The commercial nature of the property and the purchasers (investors) of the individual lot owners within the strata scheme also indicated a higher level of economic sophistication which would have enabled the respective purchasers to protect themselves through making informed choices or simply by walking away from the purchase.

This decision sets a dangerous precedent for prospective purchasers in new developments which are strata schemes by limiting the liability of the builder to the purchasers of property for defective building work. While statutory warranties which are governed by the Home Building Act 1989 (NSW) still exist with respect to residential properties it seems that purchasers or investors in property deemed to be commercial in nature are not afforded protection on the simple basis that they are generally in a better position to make informed decisions about the nature of their investment. The fact that an Owners Corporation is in a "vulnerable" position in respect of a construction contract due to its inability to bargain for contractual protection seemingly does not afford it any protection which would come about under a duty of care owed by the builder to a subsequent purchaser of a property.

Forum Law, property lawyers in the inner west can advise and assist strata investors with their purchases in any area of New South Wales or Australia. The lawyers at Forum Law have strong experience all areas of strata property law.

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