A mortgagee in possession of land will not become entitled to the benefit of statutory warranties and/or home warranty insurance under the Home Building Act 1989 (NSW) as either a successor in title or a non-contracting owner, notes Imogen Bailey.
Railway Land Holdings Pty Ltd (developer) engaged Lifestyle Property Development (builder) to construct a residential strata development. The development was financed by the plaintiff, Gardez Nominees Pty Ltd (financier), who took a registered mortgage over the property as security. The developer, builder and financier entered into a builder's side deed to entitle the financier to certain rights in connection with the building contract. The developer took out home warranty insurance with the defendant (insurer) covering the developer for loss or damage resulting from the non-completion of the work in the event of the builder's insolvency or arising from a breach of the statutory warranties under the Home Building Act 1989 (NSW) (Act).
The builder became insolvent partway through the development and there were defects in the work carried out. The developer defaulted on its mortgage to the financier, who took possession of the land. The financier lodged a claim with the insurer on the basis that, as mortgagee in possession of an unfinished and defective strata residential development, it was entitled to claim directly against the insurer for the loss incurred by being unable to recover the cost of rectifying the work from the insolvent builder. The insurer denied liability, and the financier commenced proceedings to challenge the insurer's decision.
The court held that the financier had not established any entitlement to claim against the insurer, either as a successor in title or a non-contracting owner.
Was the financier, as a mortgagee in possession, the developer's successor in title?
Under sections 18D(1) and 99(1)(b) of the Act, the mechanism for transfer of the benefit of the warranties and insurance is transfer of the owner's title. The court held that possession under a mortgage is the exercise of a statutory right flowing from the security interest conferred under section 57(1) of the Real Property Act 1900 (NSW), and is not a transfer or succession of title to the land mortgaged.
Was the financier capable of becoming a non-contracting owner within the meaning of the Act?
Under section 3(1) of the Act, a 'non-contracting owner' will have the same rights in respect to statutory warranties and home warranty insurance as a party to the building contract. The financier argued that when it became a mortgagee in possession of the land it thereby became a non-contracting owner, and that it was entitled to the same rights as the developer under section 18D(1)(A) of the Act.
Hammerschlag J held that the status of an owner as a non-contracting owner refers to the state of affairs at the time when the contract was entered into. A later owner therefore cannot be a non-contracting owner under the Act.
The court also held that, even if the financier was a non-contracting owner, it would not have obtained the right to make a claim under the insurance policy, as it directly excludes claims by developers, which his Honour stated was in accordance with the scheme of the Act.