Introduction
A recent decision of the New South Wales Court of Appeal focuses attention on the terms of the sale contract when developers sell units “off the plan”.[1]
Background
Rialto Sports Pty Limited (“Rialto”) owned and developed a four-storey commercial strata building consisting of 27 units at the Kingsway, Miranda. In early to mid-2014, prior to completion of the building, Rialto entered “off the plan” contracts of sale for some of the units. The building was completed in October 2014. After completion, in September 2015, other units were sold to other purchasers.
The builder engaged by Rialto went into liquidation in January 2016.
The façade cladding of the building was constructed with aluminium composite panelling (“ACP”) cladding containing a polyurethane content of 87 per cent. This material is now banned for use in buildings of this type.
In April 2018, four unit owners each commenced separate proceedings against Rialto. The owners’ corporation and the other unit owners did not join into any of the proceedings.
The main aspect of the claims related to the use by the builder of the ACP cladding and defective waterproofing on the façade. The owners’ corporation imposed a special levy of $660,000 in August 2020 to fund the removal and replacement of the cladding. The total claim for defects in the common property was $1.35 million.
The claims were heard in the District Court of New South Wales and were based on the terms of the contracts of sale of the units. Rialto appealed the decision of the District Court to the Court of Appeal. One of the grounds of the appeal was the alleged failure of the judge to provide adequate reasons for the decision.
The Court of Appeal upheld this ground and then proceeded to provide comprehensive reasons dealing with the other grounds of appeal.
Contract terms
In relation to the “off the plan” purchases, the contracts contained construction obligations in differing terms. One contract stated the obligation as follows:
The building in which the said unit is situated is in the course of construction and shall be constructed by the vendor in a proper workmanlike manner in accordance with the plans and specifications approved by the Sutherland Council.
Two other contracts had the obligation to construct in these terms:
Before Completion the vendor must cause the construction and completion of the Building in a proper and workmanlike manner in accordance with the Development Consent.
Rialto’s submissions
Rialto submitted that the contracts required it to ensure the building was constructed but did not require Rialto to construct the building itself. For that reason, Rialto said its obligation as the developer was to use its “best endeavours” to cause the building to be constructed in a proper and workmanlike manner. Rialto said that by engaging the builder it had discharged that obligation.
Rialto pointed to the terms of the contracts offering to the individual unit holders a narrow window of time within which to claim for the rectification of defects.
Common property argument
Rialto also said that given that the individual unit holders were not provided with ownership of the common property, it was nonsense to suggest that Rialto was providing a warranty to the individual unit owners for the façade of the building.
In any event, said Rialto, the individual unit owners were not able to make a claim for defects in the common property and were not suffering loss as this was a loss suffered by the body corporate.
Merger
Rialto also said that its obligation to construct in a workmanlike manner had ceased at the point of completion of the property transfer under the legal principle applicable to the sale and transfer of land known as merger.
The concept of merger has a special place in the sale and purchase of land, where typically, the parties identify any clauses in the contract that do not terminate at the time of the transfer of the land. This has been a longstanding principle in order to have finality at the time of the sale and transfer of land. The contracts identified some clauses that were said to survive the completion of the building work. The contracts did not expressly state that the obligation to construct in a workmanlike manner survived completion.
The Court’s decision
In relation to the contract terms, the Court accepted that there was no obligation on Rialto itself to carry out the construction. However, the Court rejected Rialto’s suggestion that by engaging the builder to carry out this work, it had discharged its obligations under the sales contracts.
The obligation was to construct the building in a workmanlike manner and the fact that Rialto subcontracted the work to a builder did not excuse Rialto from its good workmanship obligations to the purchasers.
As to the common property submission, the Court said that each individual unit holder was directly impacted by the defects in the common property and was an equitable owner of that property. Each unit holder had suffered loss by reason of the raising of the levy to carry out the replacement and repairs to the façade.
In relation to the merger argument, the Court held that it was well established law that the right to enforce a vendor’s obligation to construct a building on the property in the manner set out in the contract, is a right “collateral” to the conveyance which does not merge on completion.
Having determined these issues of liability, the Court of Appeal referred the dispute out to an expert to determine the appropriate methods of rectification of the façade and the water ingress and for determinations of quantum of any remedial work, including defects to individual apartments as claimed.
Conclusion
Developers and purchasers should consider the terms of their sale and purchase contracts. Where the contracts include an obligation to construct in a workmanlike manner or in a manner compliant with the National Construction Code, the developer may find itself liable for defective work if the builder it engaged is unwilling or unable to meet claims brought for rectification.
[1] Rialto Sports Pty Limited v Cancer Care Associates Pty Limited; CCA Estates Pty Limited; Davjul Holdings Pty Limited; Armmam Pty Limited [2022] NSWCA 146
