Buying a property ‘off the plan’ has become more and more common in Australian cities, where multi-unit residential developments have increasingly replaced free-standing houses.
An important feature of most off the plan purchases is that the building has not yet been built when buyers enter into contracts to buy the property.
Buyers are essentially buying something that does not exist when they agree to buy it.
Buyers take a chance that their off the plan property, when built, will be the same as the one the developer represented to them in pictures or audio-visual productions or display units. They also take a chance that the building including their property will be properly constructed and free from lingering defects or other problems.
Sadly, all too often there are significant construction defects that leave new off the plan property owners with the job of getting them fixed.
What do off the plan property contracts say about building defects?
Off the plan contracts generally have clauses that enable buyers to notify the developer (as vendor) of defects workmanship and materials within a (usually 3 month) ‘defects liability period’ and to require the developer to rectify those defects within a reasonable period.
However, that only applies to defects within the individual owner’s own strata lot and not defects in the building as a whole.
Legislative action in NSW to address defective construction work
Recently, well publicised problems with construction design, engineering and/or building standards have led to drastic legislative action being taken. In 2020, the NSW Government passed the Buildings (Compliance and Enforcement Powers) Act 2020 (‘the Building Commissioner Act’), which created the Office of the Building Commissioner. It also passed the Design and Building Practitioners Act 2020 (‘the DBP Act’), which regulates building design practitioners, their work and introduced a duty of care owed by them to current and future property owners. Those property owners now have a statutory right to sue those practitioners for substandard design or building work.
The Rialto Sports case: Off the plan buyers’ contractual rights against a developer
In addition to those protective legislative measures, the recent case of Rialto Sports Pty Limited v Cancer Care Associates Pty Limited [2022] NSWCA 146 (‘the Rialto Sports case’) in the NSW Court of Appeal confirmed that purchasers of strata title units bought off the plan may also have a right to claim damages for rectification of defective building work arising from their off the plan purchase contract.
In the Rialto Sports case, the off the plan buyers were adversely affected by action taken by Sutherland Shire Council in 2017 requiring the removal and replacement of combustible aluminium cladding from the exterior of the northern and southern facades of the commercial building. Having completed their off the plan purchases in October 2014, the buyers were then required by the owners corporation of the strata scheme to pay their proportional share of a special levy of $660,000 that was raised to meet the rectification costs.
The builder went into liquidation in January 2016, so the four buyers (who collectively owned eight lots representing 49% of the total strata lot entitlements) sued the developer (Rialto). Their lawsuit filed in the NSW District Court in December 2018 relied on the developer’s undertaking in each off the plan contract that it would construct the building “in a proper workmanlike manner” in accordance with the plans and specifications approved by the Council and with the Development Consent.
The developer’s promise to construct the building in a proper and workmanlike manner is in addition to its promise to convey the strata lot within that building in accordance with the registered strata plan (and the floor plan (if any) and schedule of finishes).
Most if not all off the plan contracts contain similar undertakings by the developer selling the property, so the case is potentially relevant to all off the plan buyers.
What the Rialto Sports case decided – developer responsible for rectifying defects
The Rialto Sports case upheld the earlier findings of the NSW District Court that those lot owners were able to recover almost $1.4 million for their share of the cladding replacement and remediation of water ingress on the southern façade directly from the developer pursuant to their off the plan sale contracts.
In doing so, the Court rejected arguments by Rialto that its materials and workmanship obligation in the sale contracts was merely on a ‘best endeavours’ basis and also found that that obligation survived completion of the contracts despite there being no express provision to that effect.
The question of whether Rialto’s workmanship obligations survived completion of the contracts was determined by the Court by interpreting various other provisions in the contract. While there was no provision specifically stating that the workmanship obligations continued after completion of the sale, various other special conditions referred to those provisions ‘which are intended to have application after Completion’ having such application. The Court found that survival of the workmanship obligation was not inconsistent with those provisions and that the provision was intended to have effect after completion of the sale of the strata lot under the contract.
The Court found that:
- although the owners corporation has a statutory duty to maintain and repair the common property of the strata scheme, that duty did not displace the rights of the purchasers under their contracts to enforce the developer’s promise to ensure that the whole building (not just the individual lots being conveyed by the contracts) would be constructed in a proper and workmanlike manner;
- each individual lot owner has an equitable proprietary interest in the common property as tenant in common with the other lot owners;
- regardless of the owners corporation’s role as owner of the common property, the individual lot owners therefore had standing to bring their own claims for breach of contract to the extent of the ‘infringement of their proprietary interest in the common property’;
- it would require a ‘significant rewriting’ of that workmanship obligation to accept Rialto’s contention that it required only something ‘replicating substantially’ the relevant plans; and
- although Rialto was entitled to subcontract the building work to a builder, that did not excuse it from its workmanship obligations to the lot owners.
It was also significant that the contracts were with the individual purchasers of the off the plan lots, so there was no contractual relationship between the developer and the owners corporation that came into existence when the strata plan was registered just before completion of the purchases.
The Court took a holistic view of liability in the light of the lack of contractual links between Rialto and the (later formed) owners corporation and liability in negligence to those corporations for defective work, observing that ‘it was commercially sensible for the purchasers to obtain a warranty from Rialto as to good workmanship of the building as a whole’.
The Court also found in favour of the lot owners in relation to rectification which had not yet been carried out, observing that the lot owners were able ‘to recover the costs of rectification of incomplete or defective building work in accordance with the contract’.
The Court made clear that that applied, even if the work may never be carried out by the owners corporation, because Rialto has majority control of the owners corporation, or because the lot owners were unwilling to commence proceedings to force the owners corporation to carry it out.
NSW’s ‘combustible cladding crisis’ and off the plan property defects
The Rialto Sports case is therefore of significant interest in the context of the ongoing ‘combustible cladding crisis’ in NSW and elsewhere, confirming that developers could well be ‘on the hook’ for liability to lot owners under their off the plan contracts of sale, especially where (as here) the builder has gone into liquidation.
Off the plan contracts are generally drafted to give the developer (as vendor) significant flexibility in carrying out the project and making such changes as they deem necessary along the way. They also prevent buyers from rescinding the off the plan contract or delaying completion except in the case of major defects or significant adverse changes in size or design from what was in the draft plans. Developers give themselves a lot of protection in off the plan contracts against claims by buyers regarding such matters.
Lessons learned for off the plan buyers – it’s now more feasible to pursue developers to rectify building defects
It is to be hoped that effect of the Building Commissioner Act and the DBP Act and the rights available to off the plan purchasers following the Rialto Sports case will force developers and design and building practitioners to raise their game and try harder to complete higher quality building projects that meet all relevant Australian standards and building codes.
It should give off the plan property buyers greater comfort to know that they are now in a stronger legal position to obtain appropriate remedies through the courts if developers and their contractors fall short of the mark.
At the very least, those looking to buy a property off the plan should look to ensure that the off the plan contract they enter into will require the developer (as vendor) to undertake to build the project in a proper and workmanlike manner in accordance with all applicable Australian building codes and standards.
