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Land Owners Liability for Defective Building Work in Developments

developments

In this age of booming property prices, many home owners are being approached by developers to enter into joint ventures to develop their land in exchange for one or more of the dwellings in a multi-dwelling residential project. While this may provide a financial windfall for many home owners, it can open the door for liabilities to be attached to the home owners that may in the future take away any benefit that has been gained.

Warranties

  • Changes to the Home Building Act 1989 (Act) in 2015 meant that developers have a greater liability for the rectification of defective building work as they are now required to provide statutory warranties for the building work. The warranties are the same warranties a builder must provide to any party that they contract with to undertake residential building work.
  • The warranties provide that the building work must be completed in accordance with the relevant building standards and not be defective. The builder, and now the developer, provide a six year warranty cover for major defects and two year warranty cover for other defects. Major defects are defects found in major structural elements of the building and include waterproofing and fire services.

Who is a developer?

  • The Act defines a developer as an individual, a company or partnership on whose behalf the work was done and the owner of the land if the residential building work was done in connection with an existing or proposed dwelling in a building or residential development where four or more of the existing or proposed dwellings are or will be owned by the individual, partnership or corporation.
  • This means that the owner of the land being developed may be classified as a developer even if the work is actually done on behalf of another person, for example, on behalf of a party to a joint venture who has an agreement with the owner of the land.

Subsequent owner’s rights

  • The subsequent owners of the dwellings are entitled to the benefits of the statutory warranties. In circumstances where the builder has disappeared or become insolvent and the development company has been de-registered, the subsequent owners are potentially able to pursue the original owner of the land where they are found to be developers of the land.
  • The cost of rectifying defective building work, especially where there is defective structural work, can be significant and may lead to dire financial circumstances for the original owner of the land.
  • In many cases the owners may be in poor economic circumstances and may not have any assets other than the equity in their land. Should there be a claim for the rectification of defective building work, then the owner may lose any property they have in order to rectify the defective building work.

Joint Agreements

  • There are many alternative arrangements available to home owners thinking of selling to a developer or wanting to benefit from a joint agreement to realise more benefit from their property. One of the options available are joint venture agreements. Joint ventures are complex documents setting out the rights and responsibilities of the parties with a view to limit liability while leveraging each party’s skills, assets and experience. A properly drafted joint venture agreement can also allocate profits and liabilities including tax and financing. There may however be additional liabilities resulting from implied warranties as to the quality of the work and it may be worth assessing alternative options. It is recommended that owners obtain legal advice on any agreement with a developer so as to be aware of any potential liability.

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