Developers and builders should be aware of a recent case in the Supreme Court of NSW where an owners corporation (OC) failed in its attempt to sue a builder for alleged defective works in a serviced apartment scheme.

The OC conceded that the contractual defects liability period had expired and that it did not have the benefit of the statutory warranties under the Home Building Act 1989 (which only relates to residential buildings) but argued that the builder was liable in negligence because it owed the OC a common law duty of care.

The decision confirmed that owners corporations will have great difficulty establishing that builders are liable for defective works in developments that are used for commercial and other non-residential purposes.

The facts and decision in a nutshell

The case concerned a strata title development of a serviced apartment complex operated under the name ‘Mantra Chatswood Hotel’. The serviced apartment complex was part of a larger development (which included residential apartments) constructed by the defendant, Brookfield Multiplex (Brookfield), under a design and construct contract with the developer, Chelsea Apartments Pty Ltd (Chelsea). Chelsea passed title in the serviced apartment strata title to the OC after completion. Title passes automatically upon registration of the strata plan of subdivisions which creates the common property (which is owned by the owners corporation) and the lot property which is owned by the individual lot owners.

The OC sued Brookfield for negligence, claiming there were many defects in the common property of the serviced apartment complex. The OC, represented by barrister Frank Corsaro SC, accepted that because the development was for a commercial purpose, it did not have the benefit of the statutory warranties under the Home Building Act1 but argued that Brookfield owed it a common law duty of care.

The NSW Supreme Court (Justice McDougall) refused to accept the OC’s argument that a duty of care existed because:

  • a duty of care of the kind claimed had never previously been accepted and was “novel”;2
  • it was undesirable for a duty of care to be imposed in circumstances where Brookfield and Chelsea had negotiated the design and construct contract (and associated liability for defects) at arm’s length and as parties of equal standing;3
  • a Court should not impose a duty in circumstances where Parliament had deliberately excluded dwellings used for the commercial purpose of overnight accommodation from the statutory warranties under the  Home Building Act;4 and
  • in all the circumstances, any attempt to extend the law of negligence should only be undertaken by a superior appellate Court.5

Other issues were raised by the parties in their submissions. In particular, the OC raised its vulnerability given it did not exist until after completion of the development. In other words, the OC had not been able to negotiate for contractual protections in relation to defective works. However, Justice McDougall found that given his decision that no duty of care had previously been recognised, it was unnecessary and inappropriate for him to determine whether the OC had a special vulnerability that gave rise to a new duty of care.6

The Court ordered the OC to pay the defendants’ costs.

Implications for builders

Subject to any appeal by the OC, the decision has the following consequences:

  1. A builder will not have liability in negligence at common law to an OC in relation to defective works. OCs will only have recourse to statutory warranties under the Home Building Act where the development is residential and is not to be used for a commercial purpose. Developments that do not have the benefit of the statutory warranties will include:
    1. serviced apartments, hotels and motels;
    2. developments to be used as a boarding house, guest house or hostel;
    3. residential accommodation for universities and other educational institutions;
    4. specialist aged care accommodation and accommodation specifically designed for persons with disabilities and children;
    5. residential accommodation for hospitals and other health care facilities; and
    6. houses and units designed, constructed or adapted for commercial use as a tourist, holiday or overnight accommodation.
  2. Contractual provisions regarding defects liability will continue to apply. It is likely that contractual remedies will be the only recourse for OCs of strata developments that are used for non-residential purposes. This Court was unconvinced that builders should owe an additional common law duty of care merely because OC’s were “vulnerable” due to their inability to bargain for contractual protections.