In this Update we look at a recent NSW Court of Appeal decision arising from an appeal from the Supreme Court[1]. The decision examines the liability of owner builders when they sell their residence following substantial renovations.

Given recent reality TV shows featuring home renovations, the decision should arouse some interest, particularly among any prospective purchasers of those properties.

Background

Mr Williams and Ms Dandris purchased a “modest three bedroom home” in Dover Heights in New South Wales in 2003 and subsequently moved into the home. In 2010 Dandris obtained an owner builder permit and engaged a builder to carry out the work on a “do and charge” basis under her supervision. During the extensive renovations Willams and Dandris vacated the home. As soon as the renovations were completed, they briefly moved back in before putting the home on the market for $3.8m.

The home was marketed by the real estate agent as offering every conceivable luxury with no detail being spared in a meticulously designed and built home. The home was advertised on the website Domain. Mr & Mrs Pisano saw the advertisements and inspected the home. The agent told the Pisanos the house was built above and beyond the standard home and the builder was a real professional and very meticulous.

The Pisanos purchased the home for $3.35 million. Within days problems began to emerge. The air conditioning did not function, door handles fell off, the temperature of the hot water system was not controlled, the garage door malfunctioned, blinds became dislodged from brackets, the pool waterfall feature did not work, cupboard doors chaffed on the carpets, poolside tiles were excessively slippery, stormwater drain covers were not fixed in, the front garden path lights did not work, glass doors would not open and close properly, locks on doors unlocked themselves, the pantry sliding door fell off, the front door was difficult to open and close due to warping, fumes emanated from the fireplace and a crack appeared in the mantle above the fireplace whilst it was in operation, the bathroom and laundry doors leaked and mould appeared in various places.

However, far worse was yet to come. When consistent rain fell, the home leaked to the point of flooding in some areas, requiring the Pisanos to remove carpets and take action during the night to prevent the flooding spreading to downstairs. By May 2012, the water was penetrating the cavity walls of the home. 19 of the 23 windows in the home leaked, and on 11 June 2012, a major flooding event occurred resulting in water flowing through many parts of the home and the tripping of the electrical system.

The Pisanos go to Court

Dandris initially carried out some rectification work, but ultimately the parties fell into dispute and the Pisanos issued a claim in the District Court of New South Wales. The matter was transferred to the Supreme Court.

The Pisanos claimed that Dandris and Williams had breached the Australian Consumer Law 2010 (“Consumer Act”) by making false representations as to the home and they had breached the NSW Home Building Act 1989 (“Home Building Act”) by failing to comply with the warranties required of building work performed by any builder.

Williams claimed the representations were “mere puffery” and not misleading and deceptive conduct. He said Dandris was the owner builder and he was not liable for any of the loss caused to Pisanos.

Dandris initially contested her liability under the Home Building Act but ultimately, her expert witness was found to be lacking in credibility. On 8 August 2014 the Supreme Court awarded the Pisanos compensation in the amount of approximately $1.2m.

The Supreme Court’s finding

The Supreme Court found Dandris and Williams had renovated the home with a view to resale and on that basis were engaged in “trade and commerce” when they sold the home and made the representations as to its facilities in the advertisements. The Court found both Dandris and Williams had engaged in misleading and deceptive conduct in breach of the Consumer Act when they provided false information to the agent. For example, the assertion the builder was a professional was clearly untrue as it was Dandris’ first building project. The Court said both Dandris and Williams were jointly and severally liable to pay the full judgment sum.

In addition to the above findings, the Court said Dandris had breached the warranties in the Home Building Act by not performing the work in a proper and workmanlike manner, using unsuitable materials and building a home not fit for human habitation. The Court found Dandris liable in the same amount for breaches of the Home Building Act. However, Williams was not named as the applicant for the owner builder permit and was not liable under the Act.

The Pisanos also sued the real estate agent but by the time of the trial, the agent had entered liquidation and had no insurance. The claim against the agent was discontinued at the commencement of the trial.

It appears Dandris may have been unable to pay the judgment sum potentially leaving the Pisanos only with recourse against Williams.

Williams appeals

Williams appealed to the NSW Court of Appeal. Williams said the Supreme Court had erred in finding the representations were made “in trade and commerce”. He said the home was constructed as a residence for him and Dandris and the decision to sell was made due to the eventual high cost of the renovations.

The Court of Appeal first examined whether the sale of a residence by owner builders through an agent can be typically categorised as a sale in “trade or commerce”.

The Court said the normal sale of a property by an owner is not an activity undertaken in the course of a trade or business. It is necessary to look at the motivation for the transaction. A joint owner of a residential property joining in renovating and selling their property for a profit when they have been living in it for some years does not lead to the conclusion the sale of the property is “in trade or commerce”.

It is significant to note under the NSW Home Building Act an application for an owner builder permit must be refused if the applicant obtained an owner builder permit for another property within the previous five years. This is a much tighter restriction on owner building than in other states. The restriction means owner builders in NSW cannot engage in sequential renovation projects and is likely to have had some influence on the Court’s decision that the sale was not “in trade or commerce”.

Under s84 of the Home Building Act, if an agent makes representations as authorised by an owner, the representations are to be considered as those of the owner as well as those of the agent. The Pisano’s argued the agent was obviously engaged in trade and commerce when making the representations and on that basis, the owners were also caught by the Act. However, the Court said the fact the agent is involved in trade or commerce when making the representations does not change the fundamental character of the owner’s activities, which in this case were not in trade or commerce.

Accordingly the Court said Williams was not liable for misleading and deceptive conduct. Given he was not found liable on any other basis, Williams was entirely successful on the appeal leaving the Pisanos with a victory equivalent to defeat.

Conclusion

The decision clarifies the position in NSW in relation to whether an owner builder selling their renovated home is engaged in trade or commerce. It appears now the likely answer in NSW is no.

The Northern Territory legislation is similar the NSW Home Building Act in that an owner builder is ineligible to receive an owner builder licence for another property for a period of 6 years from the date of issue of a previous certificate. However, the less stringent restrictions on owner builders in South Australia could well lead to a different factual situation and a possible different outcome. It appears the motivation of the owner builder is the significant consideration.

Perhaps the most salient warning to be taken out of this case is the severity and extent of the defective building work included in a supposedly upmarket renovation. The owners in this case obtained a pre-purchase inspection but the defects that emerged were largely hidden and not of a nature normally encountered when a reputable builder carries out the works.

Finally, the case is an illustration of the possible ultimate loss that can occur when litigation runs its course and the liable party is unable to pay the judgment sum.

[1] Williams v Pisano [2015] NSWCA 177