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Preliminary agreements & home building contracts

Construction Law News | June 2017

At the preliminary stages before a home building project actually commences, it is often the builder’s responsibility to attend to administrative tasks such as arranging surveys, geotechnical reports, soil tests, ordering plans and making development applications to council. These works are usually undertaken prior to the builder and the client entering into a formal contract for the project and can result in the builder being left out of pocket if a client changes their mind and does not wish to proceed with the construction of the house. The risk of this occurring can be reduced by entering into a preliminary agreement with the client which obliges them to reimburse and pay for these preliminary works.

A preliminary agreement generally relates to the background tasks that a builder undertakes on a particular job and can be used where parties agree to be immediately bound by their negotiated terms, but expect to make a future contract containing additional terms.

If a particular type of work on a job is building work and would require Home Building Compensation Fund (HBCF) Insurance, it should not be included in a preliminary agreement. The HBCF insurance must be provided prior to the commencement of construction of the house.

Should one party to a preliminary agreement not wish to proceed with the project, it is important that the preliminary agreement contains terms which clearly show that the parties will be bound to the terms of the preliminary agreement for the tasks contained in that agreement, including the payment to the builder for completing those task, quite separately to the construction of the house which is the subject of a separate contract.

With respect to the main home building contract for the building works it is essential that a builder clearly outlines in the scope of works exactly what works are included and excluded under the home building contract. Builders must also be aware that the Home Building Act 1989 (NSW) prohibits taking a deposit or any monies from a client if the project value is over $20,000 and where HBCF Insurance has not yet been provided. A builder can take money from a client under a preliminary agreement for the preliminary tasks not including the construction of the house.

Some considerations for preliminary agreements include:

  1. A preliminary agreement should include an express clause stating whether it is intended to be legally binding;
  2. A court will endeavour to give effect to the express intent of the parties to a preliminary agreement, where that agreement is intended to be binding; and
  3. Certain agreed terms for the separate home building contract may be expressed in the preliminary agreement as being “subject to the [main] contract” to avoid later disputes.

Preliminary agreements can play an important role in documenting the agreements between parties, however careful drafting is essential to avoid time-consuming and potentially expensive disputes. The true nature of a preliminary agreement and clear intention of the parties is critical to the enforceability of the agreement.

Forum Law is well qualified to provide builders and other contractors with up to date professional legal advice in the specialised area of building and construction law. Contact us on (02) 9560 3388 between 8am–6pm Monday–Friday for a 30-minute obligation-free call to discuss your concerns.

Forum Law is an active member of several reputable law and industry associations. We have recently obtained ISO9001 accreditation.