Sellers can advertise a house for sale as renovated to the highest standard, without being responsible to compensate buyers for building defects, according to the NSW Court of Appeal in the decision of Williams v Pisano [2015] NSWCA 177.

How was the house advertised for sale?

53 Blake Street, Dover Heights was advertised as a double-storey five-bedroom house with views of Sydney Harbour from a rooftop terrace. It had a new swimming pool with a water feature.

The selling agent placed a ‘for sale’ web advertisement on the “Domain” website and distributed a glossy brochure headed:

BRAND NEW CUTTING EDGE CONTEMPORARY FAMILY RESIDENCE

Offering every conceivable luxury for your absolute comfort and security, this stunning suburban oasis showcases state of the art technologies with fixtures and finishes of the highest standard. Offering 400sqm of seamlessly integrated indoor/outdoor living, no detail has been spared with this meticulously designed and built home. 

The trial judge, Justice Hammerschlag (reported as Bruno Pisano v Georgia Dandris [2014] NSWSC 1070) found that the statements in the brochure and on the web advertisement were misleading and deceptive and false representations, because the house was, and is, profoundly defective in its construction.

The trial judge decided that the vendors were responsible for the misleading statements because they had authorised the selling agent to issue the brochure and place the web advertising.

What were the building defects?

The house had been the family home of the vendors since 2003, before it was extensively renovated in 2010 - 2011, then marketed for sale.

One of the vendors (Georgia Dandris) was the owner-builder. She engaged a builder on a ‘do and charge’ basis, in this case the cheaper option, instead of accepting a fixed quote of $887,370. She called herself an “interior designer”. Although she had no building experience, to save money, she did not engage an architect to supervise the work and early on, dismissed the consulting engineer.

The purchasers purchased the house in December 2011, shortly after the renovations were completed. They paid $3,350,000. The purchasers first noticed problems soon after moving in. A few months later, they experienced significant damage caused by water penetration after rainy weather.

Dandris, as owner-builder, was liable for breach of the statutory warranties under sections 18B & 18C of the Home Building Act 1989 (NSW), by not performing the work in a proper and workmanlike manner, not using good and suitable materials and not making the dwelling reasonably fit for occupation.

The Court ordered Dandris to pay defects rectification costs which totalled $1,171,125 (inclusive of GST). The major defects and costs to rectify for each were:

  • water penetration from the new roof terrace (damage to ceilings and walls cracking), variations in stair risers and inappropriate installation of the doorway to the terrace - $252,824
  • inadequate sealing to 19 of 23 new windows and doors which were leaking, no drains, poor or no flashings - $181,815
  • water penetration due to a defective roof cladding and gutter system on the new roof, inadequate cavity flashings affecting internal walls, floors and ceilings - $226,939
  • rear wall out of alignment in the dining room - $169,334
  • no slip resistant tiles on swimming pool surrounds and walkways - $54,613

This case was unusual because the vendor was an owner-builder. Normally Home Building Act defects claims will lie against a licensed builder engaged by the vendor.

Were the home sellers liable for the defects because of the misleading advertising?

The purchasers made a defects claim against the other vendor (Patrick Williams) when it became apparent that a judgment against Dandris under the Home Building Act might not be satisfied.

The claim was made under sections 18 and 30(1)(e) of the Australian Consumer Law, which allows  consumers to claim compensation if they rely on advertising which is false, misleading or deceptive. But the Australian Consumer Law applies only where the misleading advertising is in trade or commerce.

Did selling a renovated home qualify as in trade or commerce? The Court of Appeal (Emmett JA, with whom Bathurst CJ & McColl JA agreed) stated the general proposition as:

In ordinary circumstances, a person who sells his home, whether by private treaty or by auction and whether he conducts the negotiations personally or through a real estate agent, would not be said to be undertaking those activities in the course of a trade or business or in a business context.

The Court of Appeal concluded that the sellers were not liable under the Australian Consumer Law for the building defects because the misleading advertising was not made in trade or commerce.

Therefore, even though buying a home is by far the most expensive purchase they are likely to make, a home buyer has no protection under the Australian Consumer Law if they are sold a ‘lemon’ (a renovated home with significant building defects) by a home owner, because the sale is not a business transaction. 

This decision exposes a huge gap in consumer protection for home buyers when they purchase a renovated house from a home owner.

Conveyancing lessons – what could have been done differently?

The Contract for Sale contained two important certificates, namely –

  • A Final Occupation Certificate issued by the Waverley Municipal Council – this certificate is issued to an owner on completion of building work. It certifies that the work complies with Council conditions of approval and the Building Code of Australia. It permits the house to be occupied.
  • A Home Warranty Insurance Certificate – this certificate must be issued to an owner by a building work insurer before work commences. The insurance is taken out by the builder, in this case, it was by an owner-builder. The insurance covers building defects up to a specified amount – currently, the minimum cover is $340,000.

These certificates do not offer sufficient protection to purchasers against building defects. The Council Certificate is limited in scope - it does not certify absence of defects. The Home Warranty Certificate cover is limited in amount - it provides a claim against the builder’s insurer, not the seller.

In this case, the purchasers decided not to obtain their own pre-purchase building inspection report. Their decision cost them dearly.

It is important to obtain building (and pest) inspection reports before signing the Contract for Sale. After the Contract for Sale is signed and exchanged, and the cooling off period expires, the purchaser has no rights to rescind the Contract or to claim compensation against a vendor because of building defects or pest infestations.

If a pre-purchase inspection report identifies building defects, these can be addressed in the Contract for Sale by way of a price reduction or by including a special condition in the Contract that the vendor agrees to rectify the defects or by not proceeding with the property purchase.

In conclusion, Buyer Beware

Home owners who renovate and sell can sleep soundly.

By dismissing the defects claim made against the sellers, the Court of Appeal has confirmed that in cases of residential property sales by home owners, the legal maxim of caveat emptor (“let the buyer beware”) protects sellers against claims by home buyers for compensation for building defects.