Can an owners corporation pursue a remedy for defects on common property?

The question of how an owners corporation might obtain a remedy for defects on common property is a complex one and, to a certain extent, is dependent upon the contracts executed as between the developer and builder, and between the developer and the purchasers of the lots. However, some general observations can be made.

Contractual context

Developers and builders often execute design and construction contracts which shift the risk associated with project design to the builder, away from the developer (see for example, clause 2.2(a) of AS4902-2000 General conditions of contract for design and construction). Therefore, the builder will often be responsible for defects in both construction and design.

The developer will usually enter standard form Contracts of Sale “off the plan” with each of the purchasers of the lots. Often, any changes to the Contract of Sale, whether sought by a prospective purchaser or the developer, need to be approved by the builder under the contract it has with the developer. This means that, in a practical sense, the lot owner has very little bargaining power. If they don’t like the contract, they can walk away without signing but gaining amendments to it can be difficult.

The standard Contract of Sale provides contractual remedies for individual lot owners in relation to defects. It will usually place an obligation on the developer to address defects with the builder in relation to the lot being sold, and may also provide an obligation on the developer to address defects on common property. Where the design risk has been shifted to the builder, the obligation to address defects should include both design and construction defects, however, this is often not the case.

The owners corporation holds legal title to the common property; the lot owners hold equitable title as tenants in common: Body Corporate No 1/PS40911511E St James Apartments v Renaissance Assets Pty Ltd (2004) 11 VR 41.

The owners corporation does not have a contractual remedy in its own right. In fact, it usually does not even exist at the time the relevant contracts are executed; the owners corporation is created when the plan of subdivision is registered: Subdivision Act 1988 (Vic), s27. This means that the developer is usually the initial owner of the common property, and the owners corporation is classed as a subsequent owner.

Negligence

The status of the owners corporation as a subsequent owner is important in terms of deciding whether or not the builder owes a duty of care to the owners corporation to avoid pure economic loss (recall Bryan v Maloney (1995) 182 CLR 609 and Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 216 CLR 515).

Where detailed contractual provisions exist to determine how defects will be dealt with as between the developer and builder, and the developer and the individual lot owners, and particularly where there is a commercial aspect to the development, an owners corporation is unlikely to succeed in negligence: Brookfield Multiplex Ltd v Strata Plan 61288 (2014) 313 ALR 408.

Statutory warranties

The Domestic Building Contracts Act 1995 (Vic) (DBCA ) contains a number of warranties in relation to the quality of work and materials for domestic buildings: DBCA, s8. “Building work” is defined to include the preparation of plans and specifications for the carrying out of works: DBCA, s5(g), but see also s6(e). Consequently, most design work is also covered.

The warranties do not apply to a building intended to be used for business purposes: DBCA, s6(c); they do apply to multi-level residential apartment buildings: Burbank Australia Pty Ltd v Owners Corporation PS447493 [2015] VSC 160. The law is undecided as to whether the warranties apply to the residential components of a mixed use development. They are unlikely to apply to common property in the commercial aspects of a mixed use development; they might apply to the common area residential parts of the development.

Section 68(2) of the Owners Corporations Act 2006 (Vic) (OC Act) provides that the initial owner (usually the developer) has a statutory duty to enforce any domestic building contract entered into over the land.   An owners corporation may have a cause of action against the developer for breach of statutory duty if the developer fails to properly enforce the contract, including the warranties in the DBCA.

There is limited authority to demonstrate how s68 should be applied.

Subsection (3) states that the duty applies “only while the initial owner is the owner of the majority of the lots affected by the owners corporation and only until the end of the period of 5 years following the registration of the plan of subdivision.” It is unclear whether these two limbs (majority ownership and 5 years from registration) are cumulative, or alternative. The provision is also unclear as to what “owner of the majority of the lots” means. This could be defined by either number of lots, or units of lot entitlement.

To illustrate the difference, the developer could sell all of the lots but one. That one lot may hold 60% of the total lot entitlement. The developer would therefore not own the majority of the lots on a simple numerical analysis, but would control 60% of the voting rights in the owners corporation.

It is often assumed that a simple numerical analysis applies to section 68 (see for example, Consumer Affairs Victoria, Review of the regulation of owners corporation managers: Issues Paper, 2013) but this has never been decided as a matter of interpretation by the courts.

Power of the owners corporation to bring legal proceedings

A special resolution of the owners corporation is required for the owners corporation to commence legal proceedings: s18(1) OC Act.

Where defects arising on common property cause damage to an individual lot, and the common property is integral to the lot an individual lot owner may have standing to bring a claim under the DBCA without a special resolution from the owners corporation: Johnston v Stockland Development Pty Ltd [2014] VCAT 1634. For example, where the boundary between a lot and the common property is the median of a wall, a defect on the “outer skin” of the building which is common property may cause damage to the “inner skin” which is the private lot. But this is an avenue to remedy damage caused to the lot, not to the common property.

An individual lot owner seeking a remedy for loss associated with defects that arise on and cause damage to common property without a special resolution of the owners corporation may run into difficulty in proving more than nominal damages.

Failure to obtain a special resolution is a procedural irregularity that is capable of being remedied, for example by joining the individual lot owners to the proceeding, or by staying the proceedings until a special resolution is obtained: Giurina v Owners Corporation No 1579 and ors [2012] VSC 466; Burbank Australia Pty Ltd v Owners Corporation [2015] VSC 160.

However, if an individual lot owner, or a small group of lot owners bring an application without such a special resolution they expose themselves to the risk of an adverse costs order if the Tribunal finds that it cannot, or that it is not appropriate to cure the irregularity.

Conclusion

Whether an owners corporation can pursue a builder or developer for defects on common property depends upon factors such as the contractual arrangements dealing with design, construction and purchase of the lots, and the nature of the development (commercial or residential). Many aspects of the issue have not been explored in any detail in the case law. Limitation periods, both statutory and contractual, will also be critical and have not been specifically addressed in this article.

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