In our December 2014 Law Report we discussed a recent High Court decision that found that builders of a strata-titled apartment complex did not owe a duty of care to the Owners Corporation or to purchasers in that strata scheme to avoid economic loss resulting from defective building works.  Now the Court of Appeal in New South Wales has found that a local Council, as a principal certifying authority, did not owe a duty to avoid economic loss to a purchaser of property in respect of which the Council had issued an occupation certificate.  The Court of Appeal found that the subsequent purchasers in this case were not “vulnerable” in that the purchasers could rely on statutory warranties under the Home Building Act and the purchasers could have protected themselves further by appropriate warranties in the sale contract in relation to latent defects.

The supposed avenue of protection under a sale contract is difficult to comprehend.  We have never known vendors to give warranties to purchasers as to latent defects, particularly in a sellers’ market.  In fact, sale contracts usually contain a clause where purchasers warrant that they purchase the property with all latent defects.

The Court of Appeal case involved the Ku-ring-gai Municipal Council and it was sued by Ms Chan and Mr Cox who purchased a property in Wahroonga from an owner-builder who carried out defective building works which did not comply with engineer’s drawings or approved plans (Ku-ring-gia Council v Chan [2017] NSWCA 226).  The costs of repairs of the defective building works was in excess of $0.5 million.  The trial judge decided in favour of Ms Chan and Mr Cox (the purchasers) and found that they relied on the Council to exercise care in issuing the final occupation certificate and that the Council knew that prospective purchasers were likely to rely on the occupation certificate and therefore the Council assumed responsibility to take care when issuing the occupation certificate.

The Court of Appeal disagreed and found in favour of the Council.  The Court of Appeal decided that the purchasers were not “vulnerable” because:

1. they did not actually rely on the occupation certificate as establishing there were no latent defects. There was a usual special condition in the sale contract to the effect that the vendor did not warrant that there were no latent defects and that the purchasers would not make any claim in the event any latent defects were found;
2. an occupation certificate does not certify that the building works do not contain any latent defects nor does it certify that the works comply with the approved plans or conditions of development consent. It is instead directed at authorising use and occupation of a completed building; and
3. the purchasers still had the benefit of statutory warranties under the Home Building Act and could have protected themselves when negotiating the terms of their purchase.

The Court of Appeal indicated that different tests and duties may apply if it were dealing with physical injury rather than purely economic loss which had been suffered by the purchasers.

Caveat emptor is alive and well and appears to have been extended.  When it is a sellers’ market there are really very few practical protections a purchaser can get in respect of latent defects.

Stephen Rush