Australia: Residential Focus - 4 May 2016

Last Updated: 9 May 2016
Article by Christine Jones and Rachel McNally
Most Read Contributor in Australia, September 2017

Railway Land Holdings Pty Ltd (the Developer) engaged a builder to construct a residential development consisting of the construction of 15 strata lot dwellings and restoration of a heritage listed stationmaster's cottage (the Project).  The Project was financed by Gardez Nominees Pty Ltd (the Financier), who took out a registered mortgage over the land as security.  A policy of home warranty insurance was obtained from the NSW Self Insurance Corporation (the Insurer).  A side deed was entered into between the Developer, the Financier and the Builder to give the Financier certain rights in connection with the building contract.  The builder became insolvent during the Project and there were defects in the work carried out.  The Developer defaulted under its mortgage and the Financier took possession of the land.  The Financier lodged a claim with the Insurer.  The Insurer denied liability.  This case involves the Financier contesting the Insurer's denial of liability: Gardez Nominees Pty Ltd v NSW Self Insurance Corporation [2016] NSWSC 532.

The central issue was whether the Home Building Act 1989 (NSW (the Act) gives a mortgagee in possession the entitlement to claim on a policy of home warranty insurance.  It was heard as a separate question, the Court looking at five key issues.  All questions were answered in the negative, with the answers to questions 1 and 2 determining that the Financier had no entitlement to claim under the policy of home warranty insurance, either as a successor in title or a non-contracting owner.

1.  Was the Financier, as a mortgagee in possession, the Developer's successor in title?

The Court noted that the meaning of the term 'successor in title' depends on the context.  In this case, the entitlement of the Financier related to sections 18D(1) and 99(1)(b) of the Act.  Under these sections, the mechanism for transmission of the warranties and insurance is transmission of the owner's title.  Under the Real Property Act, a mortgage is a security but is not a transfer of the land mortgaged.  The Financier has the ability to take possession and take rents and profits that flow from this, however this is statutory security interest, and does not bring about succession in title.

2.  Was the Financier, as a mortgagee in possession, capable of becoming a non-contracting owner?

An owner of land who was not a party to the contract will have the same rights under the statutory warranties and the same rights under the policy of home warranty insurance as the owner who was a party to the contract - sections 3(1), 18D(1)A) and 99(2A).  However, it was held that a non-contracting owner refers to the state of affairs at the time the contract was entered into, not subsequently. 

3.  If the Financier is a non-contracting owner can it claim against the Insurer for work done prior to it becoming a mortgagee in possession?

This was held not to arise (see issue 2), however even if the Financier was a non-contracting owner, it would not have had the right to make a claim itself, rather, it would have had the benefit of being able to pass the benefit of the statutory warranties and the benefit of the policy of home warranty insurance to subsequent owners.

4.  Was the Financier a person on whose behalf work was done pursuant to the side deed or the building contract, and therefore on becoming a mortgagee in possession, a developer in relation to the work done prior to it becoming a mortgagee in possession?

The Insurer argued that the side deed meant that the Financier was a developer under sections 3A(1) and (2), as it was a corporation on whose behalf the residential building work was done.  The Financier argued that it was not a contracting party to the building contract, and the side deed did not make it one.  The Court adopted the Financier's reasoning, finding that the side deed provided a mechanism for the Financier to realise its security, and that it was clear that the Financier was not a party to the building contract.

5.  Was the Financier, by virtue of becoming a mortgagee in possession, deemed to be a developer in relation to the work done prior to possession?

Section 3A(1A) of the Act provides that the owner of the land will be deemed to be the developer in certain circumstances.  The Financier argued that that it would be considered a developer only from when it had the status of an owner.  In contrast, the Insurer argued that the section operates to deem work done before the owner acquired the status as work done its behalf.  The Court held that the words of the section do not imply any retrospective operation.  The legislative intention was not to make subsequent owners liable for prior work completed. 

In the media

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Gardez Nominees Pty Ltd -v- NSW Self Insurance Corporation [2016] NSWSC 532

BUILDING AND CONSTRUCTION – HOME BUILDING ACT 1989 (NSW) – s 3(1), s 3A, s 18B, s 18C, s 18D, s 92, s 92B, s 92C, s 99 – availability of statutory warranties to mortgagee in possession – meaning of successor in title – meaning of non-contracting owner – whether mortgagee in possession is a developer in relation to residential work previously done – availability of home warranty insurance cover.  More...

Buildex Australia Pty Ltd v Soud [2016] NSWCATAP 83

Error of Law – hearing on the papers – Clause 9 set aside application - substantive proceedings (HB 14/20786) arose from the homeowner's claim for damages for defective and incomplete work (the homeowner's proceedings.  More...

The Owners of Strata Plan 76888 v Walker Group Constructions Pty Ltd [2016] NSWSC 541

BUILDING AND CONSTRUCTION – breaches of statutory warranties in s 18B of Home Building Act 1989 (NSW) – adoption of referee's report under Uniform Civil Procedure Rules 2005 (NSW), r 20.24 – where contract required building work comply with provisions of Building Code of Australia – where Code complied with by work in accordance with deemed-to-satisfy provision or alternative solution – where experts agreed that alternative solutions capable of achieving compliance with Code – where referee allowed additional damages to reflect possibility that alternative solution not accepted by certifying authority – whether referee erred in adopting as measure of damages the amount required to pursue alternative solution – whether referee's finding that real possibility alternative solution not be accepted justified by evidence.  More...

Sola v Yallah Project Homes Pty Ltd [2016] N Sola v Yallah Project Homes Pty Ltd [2016] NSWCATAP 96

CIVIL AND ADMINISTRATIVE TRIBUNAL – Appeal Panel – Home Building Act claim – Tribunal dismissed claim against builder as being frivolous, vexatious, or otherwise misconceived or lacking in substance – errors of law by Tribunal – appeal allowed – matter remitted to be heard by differently constituted Tribunal.  More...

MGB Building Pty Ltd v Hammond [2016] NSWCATAP 92

Whether sufficient findings of fact, whether evidence supported findings.  More...

Guan v Chan; Chan v Guan [2016] NSWCATCD 21

Home Building, scope of work, breach of statutory warranty, misleading and deceptive conduct, external administration, home warranty insurance, unlicensed builder.  More...

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.

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Christine Jones
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