Useful Resources
Apartment owners rights for economic loss from latent defects in building work
Firstly, what is economic loss?
The term economic loss encompasses any situation where an individual or organisation loses money. Financial loss is a visible loss that can be identified through legitimate financial statements.
This type of damage is not from a property damage, or any other type of non-economic damages that cannot be proven, it has to be a tangible loss of assets.
What is a latent defect?
Basically a latent defect is one which is a hidden or yet untriggered defect in a product, premises, or title to real property that cannot be discovered by observation or a reasonably careful inspection.
Contracts go some ways toward expanding and limiting that definition however.
What’s the problem?
The rule against economic loss.
Defects in buildings can also pose significant problems for you as a subsequent owner who take on a building without having contracted the relevant work. This is because you would have no claim in contract, unless separate rights or a warranty are conferred on on you.
The general rule is that damage to a building which is attributable to a defect in the structure or fixtures of that building is not recoverable – such damage is known as 'pure economic loss' as the only loss sustained is that you just paid too much for the property.
In 2011 the Court of Appeal clarified that, ordinarily, contractors will not owe duties not to cause pure economic loss. Therefore they will not owe such duties to subsequent owners.
Limited exceptions may apply if the new owner is able to show that the contractor had assumed responsibility for that loss through the provision of skilled advice or services or at least some design responsibility, and that the owner had relied on that advice or services or design.
What can I do for you?
Get in touch with me. I can assist you with the contractual allocation of risk and searches in several ways.
As the developer, we need to should ensure that all your construction contracts contain express warranties to properly address defective works in the event that they arise. You may wish to consider extending the liability period, which is generally 12 months from the date of practical completion, to a more significant time frame.
If you are an owner or body corporate, Queensland legislation provides some protection in the form of automatically subrogated rights of under a construction contract regarding works affecting the common property or land that becomes a lot in a community titles scheme. This means that body corporates and owners have some rights against a builder as if they were the developer.
However, it may be difficult for owners and body corporates to enforce these rights. That is because where owners and body corporates are not a party to the construction contract they may not have copies of the relevant documents and so an understanding of the rights and limitation periods contained in those documents.
Time will be of the essence!
Body corporates and owners should not delay investigating any possible claim that may exist.
Apartment owners may also be able to claim via the Queensland Home Warranty Scheme or the Australian Consumer Law.
Any such right to claim only arises in very limited circumstances if you an owner you will need to seek legal advice about any possible rights and remedies are available – yesterday!
When purchasing an apartment off the plan
Protect yourself by researching the builder and the developer. This may reveal previous issues with building defects on the QBCC registers, you may find owners unhappy with a builder or developers work.
When purchasing an existing apartment, you should conduct a thorough body corporate records search.
These searches will provide minutes of annual general meetings and any information on the sinking fund which might reveal any planned or recent capital works projects.
This may provide some insight into whether or not latent defects have been found and the potential cost of repairing the defects.
The Brookfield case
The decision of Brookfield Multiplex v Owners Corporation Strata Plan 61288 & Anor (‘Brookfield’) involved a dispute regarding latent building defects in the common property of a set of apartments in Sydney. A dispute arose between the appellant who was the builder, and the respondent who was the owners’ corporation in 2012.
The Decision at first instance
At first instance the Supreme Court of New south Wales held the appellant did not owe a duty of care to prevent reasonably foreseeable economic loss from the latent defects in the common property caused by defective design or construction. The court recognised and upheld the comprehensive negotiation between the developer and the appellant concerning the allocation of contractual rights. Further, the judge refused to identify or impose any ‘novel duty of care’ between the appellant and the respondent where one was not indicated by the contract.
It was also held that to rule in favour of such a premise would result in venturing into an area which was not provided for by the legislation. His honour therefore held for the appellant in the action.
The Decision on appeal to the NSW Court of Appeal
The case subsequently went on appeal to the NSW Court of Appeal where the decision at first instance was overturned.
The Court of Appeal rejected the proposition that the contract between the parties by contract and negotiations comprehensively dealt with the imposition of a duty of care to an extent which left no room for imposition of duties in tort.
The Court found a duty, however they limited it to building defects which were structural, and which constituted a danger to persons or property or made the apartments uninhabitable.
The Decision on appeal to the High Court
The issue raised in the appeal to the High Court was whether Brookfield owed the corporation a duty to exercise reasonable care in constructing the building so as to avoid causing the corporation to suffer pure economic loss from latent defects.
The High Court overturned the decision from the Court of Appeal. The High Court unanimously found that on the facts, the appellant did not owe a duty of care to the respondent.
In so doing, the judges examined the contract between the appellant and the developer and identified that the developer was adequately protected as the contract contained numerous stringent clauses which allocated liability for building defects. Thus, the court stated that to impose any duty of care would improperly modify the careful allocation of risk within the contract.
It was for the legislature to act in order to protect subsequent purchasers. While both New South Wales and Victoria have enacted such legislation, Queensland has not.
Someone remind me what the QBCC does again??
Thus, in Queensland apartment owners are not protected from latent building defects and have very limited circumstances where a builder will be liable for repair costs arising as a result of latent defects in a building.
The effect of the decision
The decision has extinguished almost any rights against builders in respect of latent defects to common property for a large number of body corporates in Queensland. It has likely ensured that new apartment blocks builds will have contracts similar to those analysed in the Brookfield case.
This will ensure that liability is allocated so as to prevent apartment owners having any rights against builders outside those allocated within the contract.
Useful Resources
Apartment owners rights for economic loss from latent defects in building work
Bank guarantees and injunctions
Costs protection in litigation
Contract binding? But I didn’t sign it!! Masters v Cameron
Contracts – liquidated damages and penalties
Default judgement – setting aside
Easements gross and restrictive covenants
Extending limitation period for starting litigation – are you out of time??