Can individual unit owners sue the developer or builder in separate actions for a proportionate share of the value of common property construction defects?
Consider the case of Rialto Sports Pty Ltd who engaged a builder to for a four-storey commercial project consisting of 27 strata title lots in Miranda in Sydney’s south in 2012.
Sales during construction – signed up as off-the-plan deals in early 2014 – included one lot to SRP Pty Ltd, two lots to CCA Pty Ltd and one lot to Davjul Holdings Pty Ltd.
The community title plan was registered in June 2014 and settlement of the off-the-plan lots occurred in October.
The buyers were alarmed when the Sutherland Council indicated in 2017 that the exterior of the northern and southern facades of the building was constructed with combustible aluminium cladding.
That prompted the body corporate to seek expert advice from a fire engineer who reported that the cladding contained 87% polyurethane and that it should be removed and replaced.
In August 2020, the body corporate imposed a special levy of $660,000 to meet the rectification costs.
Together with another buyer who acquired four lots after registration of the plan, they sought to recover a total of $1.35 mil for their share of the cladding replacement and remediation of water ingress on the southern façade.
Given that the builder had gone into liquidation in January 2016, the four – who collectively owned eight lots representing 49% of the total lot entitlements – elected to sue the developer.
Their lawsuit filed in the NSW District Court in December 2018 relied on the provision in each contract, that the developer would construct the building “in a proper workmanlike manner”.
The four claims were heard together with the developer contending that the only recourse was a claim by the body corporate against the defunct builder.
It further submitted that the “proper and workmanlike manner” clause was no more than an obligation to use “best endeavours”.
Both arguments were rejected by the trial judge who entered judgement for each lot owner’s proportionate share of the $1.35 mil loss against the developer.
On appeal, Rialto also drew the court’s attention to the contractual limits on the developer’s obligation to rectify faulty materials and workmanship – which extended only for a period of three months after completion – but conceded that these restrictions did not apply to common property.
The Court of Appeal likewise refused to read down the developer’s warranty of good workmanship to one of “best endeavours” merely because the work was performed by someone else.
Justice Fabian Gleeson in delivering the lead judgment noted that obtaining a warranty as to good workmanship of the building was “commercially sensible” on the part of the purchasers and that such warranty had not merged on completion.
Given it could not have been investigated earlier, the purchaser could not be taken to have accepted that the developer had – by the completion date – duly performed the good workmanship obligation.
The court also rejected the submission that the owners – because they did not own the property in respect of which the loss was claimed and could never undertake the remedial work themselves – had no standing to bring the claim.
“The interest of an individual lot owner in the common property is an equitable interest as tenant in common with the other lot owners,” observed Justice Gleeson.
In the court’s view, there was, therefore, no doubt that they had standing to bring their own claims for breach of contract to the extent of the “infringement of their proprietary interest in the common property”.
They were entitled to damages for the diminution in the value of their interest in the common property regardless of whether or not the rectification work has been completed and without regard to what levies had or had not been imposed.
The appeal court found squarely in favour of the lot owners on all the important points of legal principle but because the trial judge did not adequately address the evidence and make binding rulings as to the extent of defects and the cost of rectification, it referred the matter – to save time and expense – to a referee for a final determination rather than remitting it to the District Court.
Rialto Sports Pty Limited v Cancer Care Associates Pty Limited; CCA Estates Pty Limited; Davjul Holdings Pty Limited; Armmam Pty Limited [2022] NSWCA 146 Bell CJ Macfarlan JA Gleeson JA, 10 August 2022 Read case
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