Recovering Loss for Latent Defects in Construction Projects

It is often the case that defects in construction works only become obvious once a project is complete, which creates issues relating to the cause of the defect, the person responsible and whether or not loss is recoverable. If a person has grounds for making a claim, then the claim must be made within the relevant limitation period under the Limitation Act 1969 (NSW), which may differ depending on whether the claim is for breach of contract, negligence, or misleading and deceptive conduct. It is important to be aware of the existence of the Limitation Act so as to ensure that no claims are made outside of the relevant time period to seek compensation for any damage or loss caused by construction or development works. 

Invalid Termination of a Building Contract for Delay

The recent case of Patel v Redmyre Group Limited [2021] NSWCATAP 132 considered whether the owners of a property could terminate a building contract due to the Builders failure to progress works with due diligence. The Owners led evidence that the builders had not completed works by the time stipulation in the contract. However, the evidence was not sufficient and the owners relied on the builders failure to reach practical completion in their case which was detrimental to their case because the Owners ended up excluding the builder from the site after issuing a show cause and termination notice purporting to terminate the contract. 

On appeal, the Court confirmed that the onus was on the Owners to prove that the builder had not proceeded with due diligence. It was not sufficient to prove that the Builder had not reached practical completion by the date specified in the building contract. 

This case is a reminder that owners wishing to terminate building contracts must ensure that contractual notices attempting to terminate the contract are in accordance with the terms of the contract, and secondly, that owners ought to consider whether they can validly terminate a building contract, in circumstances where delay in completing building works may not be sufficient to constitute a breach warranting termination of the contract. 

New levy placed on Developers for Residential Apartment Buildings

Amendments to the Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (NSW) (RAB Act), and the Design and Building Practitioners Act 2020 (NSW) (DBP Act) havebeen made under the Building Legislation Amendment Act which was passed on 8 June 2021. The Act aims to strengthen the powers of the NSW Building Commissioner and NSW Fair Trading to enforce the new regulatory scheme and introduce a new levy on developers to pay for the administration of the DBP Act.

The levy which is payable by developers is designed to provide an ongoing source of funding to the regulator, to administer the new practitioner registration scheme and conduct occupation certificate audits. The levy to operate the scheme is hoped to avoid defects and rectification costs during a project’s life cycle. 

In addition to the existing penalties under the RAB Act, the Amending Act imposes daily penalties for each day a developer fails to notify the Secretary for the Department of Customer Service of the intended completion date or a change of expected completion date – both of which are subject to significant fines. 

New Public Health Order – Face Masks to be Worn in Common Indoor Areas of Strata Buildings

The Public Health order enacted this month mandates face masks to be work in indoor areas of common property in all residential buildings that are strata titled, community titled or company titled in Greater Sydney. Examples of common areas include a shared foyer or lobby of an apartment block, lifts, stairwells and corridors and shared laundry facilities. 

Masks must be worn by anyone entering indoor common property including residents and visitors, building managers, concierge staff and cleaners, people providing goods and services including tradespeople and contactors and those delivering food, mail and parcels. 

We will update you on any further measures enacted by the NSW Government in response to the COVID outbreak. 

New COVID Relief for Commercial Tenants

As of 14 July 2021, commercial landlords will not be able to take action against tenants impacted by the COVID-19 pandemic without first attempting to resolve the dispute by mediation.

If an impacted lessee breaches the lease by failing to pay rent or outgoings or by failing to be open for business during the hours specified in the lease, the landlord cannot take action against the tenant. However, this exception only applies to breaches between 13 July 2021 and 20 August. The landlord will only be able to take action such as eviction or suing for damages if the mediation has been unsuccessful in resolving the dispute. 

As per the Retail and Other Commercial Leases (COVID-19) Regulation 2021, an impacted lessee is a tenant who qualifies for a ‘Micro-business COVID-19 Support Grant’, a ‘COVID-19 NSW Business Grant’ or a ‘Job Saver Grant’ and had a turnover in the 2020-2021 financial year of less than $50 million. The onus is on the lessee to give the landlord a statement evidencing these three facts, and it must be given before or as soon as practicable after the breach, and within a reasonable time after the landlord requests it. 

NSW Initiative to Remove Combustible Cladding from Buildings

Project Remediate is a new voluntary program introduced by the NSW Government to remove high-risk combustible cladding from Class 2 residential apartment buildings. It offers opportunities for Owners Corporations to fund and implement removal of cladding and to contractors with skills in management to take on roles as managing contractors and to material suppliers and consultants. 

The work creates business opportunities for managing contractors, sub-contractors, suppliers of replacement cladding. Consultants and banks will also benefit because remedial works will increase asset values and decrease risk for insurers. 

The tender process is open until June 2021. To benefit, Owners Corporations should register their interest and note the key dates for the project.  

A free course about Project Remediate is available to Strata managers and committee members to help owners make an informed decision about joining. It is free until 20 September 2021, after which it will be $140. 

Eligibility for the Project is based on being a Class 2 residential apartment building in NSW and having a high-risk combustible cladding façade which requires remediation. 

A Mortgagee’s Duty of Good Faith During a Pandemic

In HSBC Bank Australia Ltd v Wang & Ors [2021] QSC 58 the Court considered whether a mortgagee had breached their duty of good faith when exercising the power of sale during the pandemic. In 2019, the mortgagee, HSBC, obtained a default judgement for recovery of possession of the mortgaged property and they obtained a valuation and estimate of the property’s value.  In 2020, the property was marketed extensively but an unsuccessful auction occurred during the period in which state and international borders were closed. Later in September 2020, the mortgagee accepted a bid which was significantly below the assessed market value.

A few days before settlement, the mortgagors lodged a caveat claiming an equitable interest in the property as registered proprietors, that the mortgagee failed to act in good faith in the exercise of its power of sale by failing to properly market the property and selling it at an under value. The Court summarised the mortgagees duty as a duty to not act ‘recklessly or wilfully against’ the interest of the mortgagor. 

The mortgagee’s representative accepted the sale price based on the property market’s uncertain long-term focus, and because the offer was significantly better than the offer at the attempted auction. 

The mortgagors argued that the bank should have waited until the borders reopened to achieve a better price, but the Court disagreed and held that at the time there was no reason to suspect that any improvement in the market was imminent. 

Moreover, the Court held that the mere fact of a sale at an undervalue does not demonstrate a lack of good faith. Instead, the mortgagors would have had to demonstrate that the mortgagee failed to take reasonable steps to obtain a proper price that amounted to unconscionable conduct. 

This case is an illustrative example of the way in which a NSW Court might deal with similar issues arising in our jurisdiction, and the impact which the pandemic and border closures will have on the ability to sell property.

Repudiation and Rescission in a Contract for Sale

In the recent case of Anastasia Kalathas v 89 Ebley Street Pty Limited [2021] NSWSC 490 considered issues of rescission and repudiation in a contract for the sale of a property. 

In 2017, the parties entered a contract for sale of a commercial property which was yet to be built. The Contract had included a car space for the commercial premises, but the February Strata Plan did not include the car space, so the Purchaser sought to rescind the Contract. The Vendor registered the strata plan in February 2020 and issued a Completion Notice, an Occupation Certificate and a Notice to Complete – although it was found during the proceedings that at that time, the Vendor was not actually in a position to complete the Contract because there was no car space on the registered plan allocated to the Purchaser’s lot. 

The Purchaser was entitled to draw the conclusion that the Vendor was not proposing to convey a car space. As the car space was an essential term of the contract, the purchaser was entitled to terminate the Contract and entitled to return of the deposit. 

Moreover, the fact that the Vendor had registered a new strata plan and was later in a position to complete after the Purchaser had commenced proceedings did not assist them in their defence. The Court held that the Vendor had repudiated the contract and the Purchaser was thus entitled to the return of her deposit and an order that the Vendor pay her costs. 

Estoppel in Construction Contracts

Notice requirements and time limits are pervasive in construction contracts. However, a party may be estopped from relying on contractual time limits if they have engaged in conduct that gives rise to an assumption that compliance with contractual notice requirements is not necessary, or if they direct additional work that will fall outside the contractual notice requirements and time limits.

The recent case of Valmont Interiors Pty Ltd v Giorgio Armani Australia Pty Ltd (No 2) [2021] NSWCA 93 considered whether a party could rely on estoppel in a construction contract. 

Valmont and Armani were parties to a construction contract in which Valmont was to provide construction and fit out works for a store at Sydney Airport. Valmont was tasked with installing joinery supplied by Armani, and Armani was going to engage a Chinese firm, Sun Bright, to supply that joinery. Sun Bright conceded that it could not meet the time stipulation, so Armani directed Valmont to supply the balance of the joinery, but Armani refused to pay for it because Valmont did not supply it within the time limit imposed by a clause of the Contract. 

Valmont pleaded that Armani should be estopped from relying on the clause. 

The Court of Appeal held that notice of an intended departure from an assumption as to a state of affairs must be given within a reasonable amount of time, and is not effective if it is given after the time at which the relevant party would have been required to give the requisite notice under the contract. 

Furthermore, the Court held that it would be unconscionable for Armani to rely in the contractual time limit, particularly as notice requirements were not strictly adhered to. A key takeaway from this case is that if a party believes that the other party may be under an incorrect assumption that compliance with certain contractual requirements are not necessary, then the party should negative that assumption as soon as possible.

Landlord Pursuing Guarantor

Baron + Associates was recently retained in litigation involving a tenant of a shop in Bondi Beach owned by our client and the tenants’ guarantor. The tenant vacated the shop prior to the termination date and as a result our client sought recovery of unpaid rent, reimbursement of costs to make good the premises, interest, and costs.

The tenant and guarantor sought to have the lease declared invalid on the grounds of purported misleading and deceptive conduct on the part of the landlord, specifically claiming that the signature of one guarantor was not made in the presence of a witness, and that the lease did not contain a deposited plan of subdivision, a subdivision certificate, or a survey. They also claimed that the lessee had returned the Lessors Disclosure Statement with a notation that they required the shop to include a separate electricity meter. These defences were rejected by the Tribunal in the original NCAT hearing and the tenant and guarantor pursued an appeal. 

The appellant raised several grounds of appeal, one of which was that the Tribunal erred in failing to find that the landlord engaged in misleading and deceptive conduct for reasons including the claim that it failed to correct the guarantor’s purported understanding that the premises were to be separately metered for electricity.

There was no evidence that any issue was raised by the tenant and or guarantor with the agent or any person concerning his request that the shop contain a separate electricity meter. As a result, the appellant was unable to establish that he was misled or under a misapprehension of which the lessor was aware and the Appeal was dismissed with the result that the original Tribunal’s order in favour of the Landlord for $750,000 (the maximum amount claimable in this jurisdiction) became enforceable.