Gardez Nominees Pty Ltd v NSW Self Insurance Corporation

Case •

[2016] NSWSC 532

•

28 April 2016

No judgment structure available for this case.

Supreme Court


New South Wales

Medium Neutral Citation: Gardez Nominees Pty Ltd -v- NSW Self Insurance Corporation [2016] NSWSC 532
Hearing dates:18 and 23 March 2016
Decision date: 28 April 2016
Jurisdiction:Equity - Technology and Construction List
Before: Hammerschlag J
Decision:

Separate Questions answered as follows:

 

Question 1: Is Gardez, by virtue only of becoming a mortgagee in possession, Railway’s successor in title within the meaning of s 18D(1) and s 99(1)(b) of the Act?

 

Answer: No.

 

Question 2: Is Gardez, by virtue only of becoming a mortgagee in possession, capable of becoming a non-contracting owner in relation to the building contract between Railway and the builder within the meaning of s 3, s 18D(1A) and s 99(2A) of the Act?

 

Answer: No

 

Question 3: If Gardez is a non-contracting owner in relation to the building contract, does s 99(2A) provide cover for the benefit of Gardez in relation to work done prior to 27 June 2014 in circumstances where Railway is a developer in relation to that work and therefore is not entitled to the benefit of cover under s 99(2)(a) and the policy?

 

Answer: Does not arise, but if Gardez was a non-contracting owner it obtained no right to claim against the insurer.

 

Question 4: Is Gardez a person on whose behalf work was done pursuant to the side deed, or alternatively pursuant to the building contract and therefore, upon becoming a mortgagee in possession on 27 June 2014, a developer in relation to the work done prior to 27 June 2014 within the meaning of s 3A(1) of the Act?

 

Answer: No.

 

Question 5: Is Gardez, by virtue only of becoming a mortgagee in possession on 27 June 2014, deemed to be a developer in relation to the work done prior to 27 June 2014 by s 3A(1A) of the Act?

 Answer: No.
Catchwords: 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.
Legislation Cited: Corporations Act 2001 (Cth) Ch 5A
Home Building Act 1989 (NSW) s 3(1), s 3A, s 18B, s 18C, s 18D, s 92, s 92B, s 92C, s 99
Home Building Amendment Act 2011 (NSW)
Home Building Amendment (Warranties and Insurance) Act 2010 (NSW)
Landlord and Tenant (Amendment) Act 1948 (NSW) s 8(1)
Real Property Act 1900 (NSW) ss 57(1), 60
Uniform Civil Procedure Rules 2005 (NSW) Pt 28 r 28.2
Cases Cited: Ace Woollahra Pty Ltd v Owners – Strata Plan 61424 (2010) 77 NSWLR 613; [2010] NSWCA 101
Anderson v Liddell (1968) 117 CLR 36
Figgins Holdings Pty Ltd v SEAA Enterprises Pty Ltd (1999) 196 CLR 245; [1999] HCA 20
Gibb v Federal Commissioner of Taxation (1966)118 CLR 628; [1966] HCA 74
Latec Investments Ltd v Hotel Terrigal Pty Ltd (1965) 113 CLR 265; [1965] HCA 17
Moreton Bay Regional Council v Mekpine Pty Ltd [2016] HCA 7
Souglides v Tweedie [2013] Ch 373
Suntory (Aust) Pty Ltd v Commissioner of Taxation [2009] FCAFC 80
The English Scottish and Australian Bank Ltd v Phillips (1937) 57 CLR 302
United Starr-Bowkett Co-operative Building Society (No 11) Ltd v Clyne [1968] 1 NSWR 134; (1967) S.R (NSW) 331
Texts Cited: Home Building Amendment Bill 2011 (NSW), Second Reading Speech, 19 October 2011
Home Building Amendment (Warranties and Insurance) Bill 2010 (NSW), Second Reading Speech, 23 June 2010
Peter Butt, Land Law, (5th ed 2006, Lawbook Co)
Tyler, Young and Croft, Fisher & Lightwood’s Law of Mortgage, (3rd Australian ed 2014, LexisNexis Butterworths Australia)
Category:Principal judgment
Parties: Gardez Nominees Pty Ltd - Plaintiff
NSW Self Insurance Corporation - Defendant
Representation:

Counsel:
P J Bambagiotti - Plaintiff
M Orlov - Defendant

  Solicitors:
Makinson d’Apice Lawyers - Plaintiff
Mills Oakley Lawyers - Defendant
File Number(s):2015/120810

Judgment

INTRODUCTION

  1. HIS HONOUR:   The Home Building Act1989 (NSW) (the Act) is a complex legislative enactment which makes provision concerning the residential building industry. Amongst others:

  • it requires a person who contracts to do residential building work to hold a contractor licence authorising the person to do that work;

  • it implies into every contract to do residential work, statutory warranties by the person required to hold such a licence, including a warranty that the work will be performed in a proper and workmanlike manner; and

  • it prohibits a person from doing residential building work under a contract unless a contract of insurance (called home warranty insurance) that complies with the Act is in force in relation to that work.

  1. Unless the context otherwise requires, all references to sections are references to the Act.

  2. The Act contains provisions which extend the benefit of the statutory warranties to successors in title to persons entitled to the benefit of those warranties, and to a person who is a non-contracting owner in relation to a contract to do residential work on land, being a person who is the owner (under an extended definition of the that term) of the land, but is not a party to the contract.

  3. It also contains provisions that a person must not do residential building work under a building contract unless a contract of insurance that complies with the Act is in force in relation to that work, and which insures a person on whose behalf the work is being done and the person’s successors in title, against the risk of being unable, because of the insolvency, death or disappearance of the contractor, to recover compensation from the contractor for breach of a statutory warranty in respect of the work, or to have the contractor rectify any such breach. A provision of a contract of insurance providing cover for the benefit of a person on whose behalf work is done on land is to be read as providing (and to have always provided) for the same benefit in relation to a non-contracting owner of the land. The Act requires a certificate of insurance evidencing the contract of insurance to be provided to the other party to the building contract.

  4. A number of provisions of the Act are directed to developers. One example is that a person who is the immediate successor in title to the developer is entitled to the benefit of the statutory warranties as if the developer was required to hold a contractor licence and had done the work under a contract with that successor in title to do the work. Another is that a compulsory contract of insurance does not require a developer on whose behalf residential work is being done to be insured. The combination of making developers liable under the statutory warranties and not requiring compulsory insurance is undoubtedly intended to spur developers on to making sure residential building work is competently done before they on sell to buyers.

  5. Railway Land Holdings Pty Ltd (Railway or the developer) embarked upon the development of a residential strata development.

  6. Railway employed Lifestyle Property Development (the builder) to build it.

  7. The plaintiff (Gardez) financed Railway, and took a registered mortgage over the development to secure the monies which it lent Railway.

  8. The developer took out home warranty insurance with the defendant (the insurer) covering Railway for loss or damage resulting from non-completion of the work because of the insolvency of the builder or arising from a breach of the statutory warranties, which Railway could not recover from the builder or have the builder rectify because of the builder’s insolvency. Partway through building the strata development, the builder became insolvent. The work it did is defective.

  9. Railway defaulted under its mortgage to Gardez and Gardez took possession of the land.

  10. Gardez claims that as a consequence of taking possession it has become entitled to claim directly against the insurer for the loss which it has suffered because of its inability to recover from the insolvent builder the cost of completing and rectifying the builder’s work.

  11. These proceedings raise for consideration the significant issue whether the Act gives a mortgagee in possession of an unfinished and defectively constructed strata residential development, the entitlement to claim the benefit of home owners warranty insurance to pay for the cost of completing and rectifying residential building work carried out on behalf of a developer, where the builder has become insolvent.

  12. The final disposition turns on the answers to a number of separate questions which the parties articulated, and which the court pursuant to Pt 28 r 28.2 of the Uniform Civil Procedure Rules2005 (NSW) (UCPR) ordered be decided separately from any other question before further trial.

FACTUAL BACKGROUND

  1. The facts are not in issue.

  2. Railway is, and at all material times has been, the registered owner of land situated 3 Brompton Road, Bellambi, New South Wales, which is in the vicinity of the city of Wollongong.

  3. By written building contract (the building contract) entered into on 25 September 2012, Railway retained the builder to build 15 strata lot dwellings and restore a heritage listed stationmaster’s cottage on the land (the development). Clause 1(b) of the building contract provides, relevantly, that pursuant to s 18B of the Act, the builder warrants that the work will be performed in a proper and workman like manner and in accordance with the plans and specifications set out in the contract.

  4. Gardez financed the development pursuant to a written Loan Agreement and General Security Agreement, which it entered into with Railway in November 2012. As part of its security for money lent to Railway, Gardez took a registered mortgage under the Real Property Act 1900 (NSW) (the Real Property Act) over the land.

  5. As well, Gardez, Railway and the builder entered into a builder’s Side Deed (the side deed) intended to give Gardez certain rights in connection with the building contract. Under cl 2.3, of the side deed the builder undertook to Gardez to perform its obligations under the building contract. Under cl 4.1, Gardez was entitled to give a Step-in Notice to the builder, upon the giving of which Gardez would become entitled to exercise and enforce all rights, powers, discretions and remedies and perform all obligations of Railway under, or in connection with, the building contract as though Gardez was a party to the building contract, instead of Railway. For convenience, relevant clauses of the side deed are set out in the Schedule to this judgment.

  6. On 1 February 2012, the insurer issued a Home Warranty Insurance Policy (the policy) covering Railway for loss or damage resulting from non-completion of the work because of the insolvency of the builder or arising from a breach of the statutory warranties under the Act, being loss or damage in respect of which Railway could not recover compensation from the builder or have the builder rectify because of the builder’s insolvency.

  7. Clause 3 of the policy provides:

This policy does not cover an interest in the work that is not your interest, and that we are not liable under the policy to any person other than you. This policy does not cover any claim by the builder. The policy does not cover a claim by any person who is, in relation to the work, a developer or the holder of a contractor licence (as defined in the Act) or another person who does residential building work in relation to the work other than under a contract…

(The references to “we” are to the insurer and the references to “you” are to Railway).

  1. Clause 7 of the policy contains the following definition:

You or your means the person on whose behalf the work is done or is to be done including any owner of the land at the time the contract is entered into, on which residential building work is done, and any successor in title to that person.

  1. The builder did not complete the building work under the building contract and as such, work it did do was not performed in a proper and workmanlike manner. As a consequence, Railway suffered loss and damage. Completing and rectifying the builder’s defective and unfinished residential building work will be costly.

  2. On 27 June 2014, Gardez gave Railway notice that an event of default had occurred under the mortgage and that Gardez had entered into possession of the land. It seems that this meant possession.

  3. Gardez remains in possession.

  4. On 5 September 2014, a liquidator was appointed to the builder and on 30 September 2014 Gardez terminated the building contract.

  5. On 11 November 2014, Gardez lodged a claim with the insurer. By letter dated 22 January 2015, the insurer denied liability. These proceedings are an appeal from that rejection.

THE RELEVANT PROVISIONS OF THE ACT

  1. The following are the relevant provisions of the Act as they applied to this dispute, which is as they stood on 11 November 2014, when Gardez lodged its claim with the insurer.

  2. Section 3(1) contains the following definitions:

developer—see section 3A.

non-contracting owner, in relation to a contract to do residential building work on land, means an individual, partnership or corporation that is the owner of the land but is not a party to the contract and includes any successor in title to the owner.

owner of land means the only person who, or each person who jointly or severally, at law or in equity:

(a) is entitled to the land for an estate of freehold in possession, or

(b) is entitled to receive, or receives, or if the land were let to a tenant would be entitled to receive, the rents and profits of the land, whether as beneficial owner, trustee, mortgagee in possession or otherwise.

  1. Section 3A defines ‘developer’ as:

3A Application of provisions to developers

(1)   For the purposes of this Act, an individual, a partnership or a corporation on whose behalf residential building work is done in the circumstances set out in subsection (2) is a developer in relation to that residential building work.

(1A)    Residential building work done on land in the circumstances set out in subsection (2) is, for the purpose of determining who is a developer in relation to the work, deemed to have been done on behalf of the owner of the land (in addition to any person on whose behalf the work was actually done).

Note. This makes the owner of the land 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 agreement with the owner for the development of the land). The other person on whose behalf the work is actually done is also a developer in relation to the work.

(2)    The circumstances are:

(a) the residential building work is done in connection with an existing or proposed dwelling in a building or residential development where 4 or more of the existing or proposed dwellings are or will be owned by the individual, partnership or corporation, or

(b) the residential building work is done in connection with an existing or proposed retirement village or accommodation specially designed for the disabled where all of the residential units are or will be owned by the individual, partnership or corporation.

(3)    A company that owns a building under a company title scheme is not a developer for the purposes of this Act.

  1. Section 18B provides:

18B Warranties as to residential building work

The following warranties by the holder of a contractor licence, or a person required to hold a contractor licence before entering into a contract, are implied in every contract to do residential building work:

(a)    a warranty that the work will be performed in a proper and workmanlike manner and in accordance with the plans and specifications set out in the contract,

(b)    a warranty that all materials supplied by the holder or person will be good and suitable for the purpose for which they are used and that, unless otherwise stated in the contract, those materials will be new,

(c)    a warranty that the work will be done in accordance with, and will comply with, this or any other law,

(d)    a warranty that the work will be done with due diligence and within the time stipulated in the contract, or if no time is stipulated, within a reasonable time,

(e)    a warranty that, if the work consists of the construction of a dwelling, the making of alterations or additions to a dwelling or the repairing, renovation, decoration or protective treatment of a dwelling, the work will result, to the extent of the work conducted, in a dwelling that is reasonably fit for occupation as a dwelling,

(f)    a warranty that the work and any materials used in doing the work will be reasonably fit for the specified purpose or result, if the person for whom the work is done expressly makes known to the holder of the contractor licence or person required to hold a contractor licence, or another person with express or apparent authority to enter into or vary contractual arrangements on behalf of the holder or person, the particular purpose for which the work is required or the result that the owner desires the work to achieve, so as to show that the owner relies on the holder’s or person’s skill and judgment.

  1. Section 18C provides:

18C Warranties as to work by others

(1)    A person who is the immediate successor in title to an owner-builder, a holder of a contractor licence, a former holder or a developer who has done residential building work on land is entitled to the benefit of the statutory warranties as if the owner-builder, holder, former holder or developer were required to hold a contractor licence and had done the work under a contract with that successor in title to do the work.

(2)   For the purposes of this section, residential building work done on behalf of a developer is taken to have been done by the developer.

  1. Section 18D provides:

18D Extension of statutory warranties

(1)    A person who is a successor in title to a person entitled to the benefit of a statutory warranty under this Act is entitled to the same rights as the person’s predecessor in title in respect of the statutory warranty.

(1A)   A person who is a non-contracting owner in relation to a contract to do residential building work on land is entitled (and is taken to have always been entitled) to the same rights as those that a party to the contract has in respect of a statutory warranty.

(1B)    Subject to the regulations, a party to a contract has no right to enforce a statutory warranty in proceedings in relation to a deficiency in work or materials if the warranty has already been enforced in relation to that particular deficiency by a non-contracting owner.

(2)    This section does not give a successor in title or non-contracting owner of land any right to enforce a statutory warranty in proceedings in relation to a deficiency in work or materials if the warranty has already been enforced in relation to that particular deficiency, except as provided by the regulations.

  1. Section 92 provides:

92 Contract work must be insured

(1)    A person must not do residential building work under a contract unless:

(a)    a contract of insurance that complies with this Act is in force in relation to that work in the name of the person who contracted to do the work, and

(b)    a certificate of insurance evidencing the contract of insurance, in a form prescribed by the regulations, has been provided to the other party (or one of the other parties) to the contract.

  1. Section 92B provides:

92B Operation of contract of insurance

(1)    If the holder of a contractor licence enters into a contract to do residential building work and a contract of insurance that complies with this Act is in force in relation to that work (whether or not the name of the contractor identified under section 92A (a) is the same as the name of the contractor in the contract), the contract of insurance is taken to extend to any residential building work under the contract at the address stated in the certificate of insurance.

(2)    An insurer who pays a claim under a contract of insurance the operation of which has been extended under this section is entitled to recover any money paid from the contractor named in the building contract or the person identified as the contractor under section 92A (a).

  1. Section 92C provides:

92C Operation of contract of insurance in relation to non-contracting owners

(1)    If the holder of a contractor licence enters into a contract to do residential building work on land and a contract of insurance that complies with this Act is in force in relation to that work, the benefit of the contract of insurance is taken to extend (and to have always extended) to any non-contracting owner in relation to the land at the time the contract to do residential building work was entered into as if the non-contracting owner were a person on whose behalf the work is done.

(2)    Subsection (1) applies irrespective of whether or not the contract of insurance concerned contains a term to the same effect as that subsection.

  1. Section 99 provides:

99 Requirements for insurance for residential building work

(1) A contract of insurance in relation to residential building work required by section 92 must insure:

(a)    a person on whose behalf the work is being done against the risk of loss resulting from non-completion of the work because of the insolvency, death or disappearance of the contractor, and

(b)    a person on whose behalf the work is being done and the person’s successors in title against the risk of being unable, because of the insolvency, death or disappearance of the contractor:

(i)   to recover compensation from the contractor for a breach of a statutory warranty in respect of the work, or

(ii)    to have the contractor rectify any such breach.

(2)    Subsection (1) does not require the following to be insured:

(a)    a developer on whose behalf residential building work is being done,

(b)   any other person belonging to a class of persons prescribed by the regulations for the purposes of this section.

(2A)    A provision of a contract of insurance providing cover for the benefit of a person on whose behalf work is done on land is to be read as providing (and to have always provided) for the same benefit in relation to a non-contracting owner of the land.

(2B)    Subsection (2A) applies irrespective of whether or not the contract of insurance concerned contains a term to the same effect as that subsection.

QUESTION 1

Successor in title

Is Gardez, by virtue only of becoming a mortgagee in possession, Railway’s successor in title within the meaning of s 18D(1) and s 99(1)(b) of the Act?

  1. Gardez, for which Mr P J Bambagiotti of Counsel appeared, argues that as mortgagee Gardez acquired an interest in the land, which interest “was augmented” with it taking possession of the land, from which point it “could take the profits from it, but had obligations to the land in the nature of upkeep, and it could sue to eject trespassers and anyone else that did not have a superior title and to this end it was a successor to [Railway] a title, being an interest in land”.

  2. The thrust of this argument is that exercise of the right of possession by a mortgagee amounts to a conveyance to it of important incidents of ownership and should be regarded as a succession by the mortgagee to the title of the mortgagor.

  3. Gardez draws attention to the fact that s 3(1) gives an extended meaning to the term ‘owner’, which includes a person who at law or in equity is entitled to receive, or receives, or if the land were let to a tenant would be entitled to receive, the rents and profits of the land as mortgagee in possession. It puts that this reveals a statutory intention that possession by a mortgagee is to be equated with title.

  4. The insurer, for which Mr M Orlov of Counsel appeared, argues that Gardez cannot be a successor in title to Railway because as a mortgagee of land under the Real Property Act (Torrens title land), registered in the name of Railway, Gardez never acquired any title to it.

  5. Gardez relies on United Starr-Bowkett Co-operative Building Society (No 11) Ltd v Clyne [1968] 1 NSWR 134; (1967) S.R (N.S.W) 331 (United Starr-Bowkett) where the Court of Appeal (Sugerman and Walsh JJA, Herron C.J. not deciding) held that a mortgagee of land under the Real Property Act, who was bound by a pre-existing tenancy, on default by the mortgagor, became a successor in title within the meaning of that term as used in s 8(1) of the Landlord and Tenant (Amendment) Act1948 (NSW) (the Landlord and Tenant (Amendment) Act).

  6. ‘Successor in title’ is not a term of art: Souglides v Tweedie [2013] Ch 373 at 376. It is protean. Its meaning in any given case will depend on the specific context in which it is used.

  7. For this reason, resort to general common law concepts, other statutes and decisions on the operation of other statutes is of limited assistance. United Starr-Bowkett is a case in (or rather not in) point. It turned on the application of specific provisions of a statute enacted to achieve a particular outcome, to a set of unique facts: see: Gibb v Federal Commissioner of Taxation (1966) 118 CLR 628; [1966] HCA 74; Moreton Bay Regional Council v Mekpine Pty Ltd [2016] HCA 7 (French CJ, Kiefel, Bell and Nettle JJ).

  8. Section 8(1) of the Landlord and Tenant (Amendment) Act defined ‘lessor’ and ‘lessee’ to mean the parties to a lease or their respective successors in title, and to include in respect of premises which were subject to a mortgage, a mortgagee who enters, or has entered into, possession of the premises under the mortgage, and a person who was a lessee of the premises under the mortgagor immediately prior to the mortgagee entering into possession.

  9. Clyne purchased a number of tenanted properties, which he then mortgaged to the Society. He then (apparently as part of a deliberate strategy to circumvent the rights of the tenants) defaulted on the mortgages and the Society, as mortgagee, obtained writs in ejectment directed to Clyne as the sole defendant claiming possession of the properties. The question was whether the rights of the tenants prevailed against the Society as Clyne’s successor in title as lessor. The Society did not satisfy the express requirements of the definition of successor in title in the Landlord and Tenant (Amendment) Act because it was not in possession. Nevertheless, the Court held that the Society could be Clyne’s successor in title for the purposes of the statute.

  10. At page 343, Sugerman JA held that under the definition of lessor in that Act the question was whether the mortgagee succeeded to, that is became entitled to and subject to, the mortgagor’s rights and duties, as between himself and the tenant under a lease granted by the mortgagor prior to the mortgage. His Honour went on to hold that where the mortgagee had notice of the tenancy before obtaining a registrable instrument, then being bound by the tenancy, it became subject to the same duties as the mortgagee as against the tenant, at least in the sense that it was bound to recognise the continued subsistence of the tenancy and could only put an end to the tenant’s possession in the circumstances and in the manner in which the mortgagor could do so. Significantly, the Society in each case had, prior to the mortgages, full knowledge and notice of the legal interest in the land of the tenants. His Honour concluded that the mortgagee was bound by the pre-existing tenancy, and at least on default by the mortgagor, became a successor in title of the lessor.

  11. Walsh JA engaged in a similar reasoning process. At page 348, his Honour held that the question whether the Society was a successor in title was not to be determined solely by reference to common law concepts of the passing of title, but was affected in an important way by a consideration of statutory provisions. His Honour noted the importance of the fact that the mortgagees took their interests subject to those of the tenants, and not free of them. At pages 349–350, his Honour concluded that if, after default, a mortgagee wished to take steps to recover possession, it did so on the basis of a succession to the rights which the mortgagor formally had against the tenant, and that a mortgagee was therefore to be regarded as a lessor within the meaning of the statutory provision under consideration and accordingly, was a successor in title to the mortgagor.

  12. One can readily understand the Court’s conclusion, especially given that the specific mischief the provision being considered sought to avoid was the defeat of a tenant’s rights of occupation because the land had been mortgaged. Additionally, the right of possession was the very subject of the contest, and one can readily understand the Court’s conclusion that the mortgagee’s right to possession derived from the mortgagor, and the mortgagee was, in that context, the mortgagor’s successor in title.

  13. The present circumstances and the object of the provisions in this case are materially distinguishable from those at play in United Starr-Bowkett. I also respectfully suggest that the process of reasoning engaged in by the Court is not apt to the present case. The Court reasoned that the mortgagee was the mortgagor’s successor in title because it was bound by the rights of the tenant against the mortgagor, rather than that it was bound by the rights of the tenant because it was a successor in title. The entitlement of Gardez to the benefit of the statutory warranties and covering insurance depends on it being Railway’s successor in title within the meaning of that term in ss 18D(1) and 99(1)(b), not the other way around.

  14. In its general meaning, ‘successor in title’ connotes no more than a person who holds title after another. The Oxford Australian Law Dictionary definition is, unexceptionally:

The party that comes later in time than another, as the holder of an estate or interest in property.

  1. The concept is used in both s 18D(1) and s 99(1)(b) to achieve transmission from the original object of the statutory warranties and corresponding insurance cover (the predecessor) to a person who subsequently comes to hold the title (the successor), which was held by the predecessor when the warranties were impliedly given, namely, the entering into of the contract.

  2. The Act does not expressly state what title it has in mind. However, the mechanism for transmission of the benefit of the warranties and insurance, both where the owner contracts with the contractor and where the owner does not contract, is transmission of the owner’s title to the successor.

  3. Thus, determination of whether party B (Gardez) is the successor in title to party A (Railway) requires identification of the relevant title held by party A at the time of the warranties, and assessment of whether that title passed to party B.

  4. As to identifying Railway’s title, this presents no difficulty. It was the registered owner of Torrens title land, or to use the expression in subparagraph (a) of the definition of ‘owner’ in s 3(1), it was entitled to the land for an estate in freehold in possession.

  5. Whether that title passed to Gardez turns on what the effect was of Gardez taking possession of the land under the mortgage.

  6. Section 57(1) of the Real Property Act provides:

A mortgage, charge or covenant charge under this Act has effect as a security but does not operate as a transfer of the land mortgaged or charged.

  1. Section 60 of the Real Property Act provides:

60 In case of default, entry and possession, ejectment

The mortgagee, chargee or covenant chargee upon default in payment of the principal sum or any part thereof, or of any interest, annuity, or rent-charge secured by any mortgage, charge or covenant charge may:

(a)    enter into possession of the mortgaged or charged land by receiving the rents and profits therefor, or

(b)    (Repealed)

(c)    bring proceedings in the Supreme Court or the District Court for possession of the said land, either before or after entering into the receipt of the rents and profits thereof, and either before or after any sale of such land effected under the power of sale given or implied in the mortgage, charge or covenant charge, in the same manner in which the mortgagee, chargee or covenant chargee might have made such entry or brought such proceedings if the principal sum, interest, annuity, or rent-charge were secured to the mortgagee, chargee or covenant chargee by a conveyance of the legal estate in the land so mortgaged or charged.

  1. Unlike the traditional form of mortgage of Old System land, where the mortgagor parted with almost all the legal title to the land, and its rights to possession depended upon the terms of the mortgage, a Torrens title mortgagee only has statutory rights, and these do not include the right to possession until it is entitled to take possession under the mortgage. It is a statutory estate: see Tyler, Young and Croft, Fisher & Lightwood’s Law of Mortgage, (3rd Australian ed 2014, LexisNexus Butterworths Australia) at 19.1.

  2. Conversely, the mortgagor remains the registered proprietor of the land and the owner both in equity and in law: see for example Peter Butt, Land Law, (5th ed 2006, Lawbook Co) at 18.23; The English Scottish and Australian Bank Ltd v Phillips (1937) 57 CLR 302 at 321 (Dixon, Evatt, McTiernan JJ); Anderson v Liddell (1968) 117 CLR 36, Kitto J at 48; Figgins Holdings Pty Ltd v SEAA Enterprises Pty Ltd (1999) 196 CLR 245 at 261–262 (Gaudron, Gummow and Callinan JJ); Latec Investments Ltd v Hotel Terrigal Pty Ltd (1965) 113 CLR 265 at 275 (Kitto J).

  3. The entitlement of a mortgagee of Torrens title system to possession of the land on the mortgagor’s default flows from s 60 of the Real Property Act, and its entitlement to the rents and profits of the mortgaged land whilst in possession flows from this statutory entitlement.

  4. By taking possession, a mortgagee acquires no additional estate or interest in the land. The taking of possession is the exercise of a statutory right incidental to and flowing from the statutory security interest which s 57(1) of the Real Property Act confers on the mortgagee. It brings about no succession by the mortgagee to the title of the mortgagor.

  5. Successor in title concerns title to the property, not its actual possession: Souglides v Tweedie [2012] Ch 373 at 13.

  6. The extended definition of ‘owner’ in s 3(1) does not assist Gardez. There is no basis to infer from the fact that a mortgagee in possession is treated as an owner for specific purposes under the Act, for example, for the purposes of the definition of ‘non-contracting owner’, any legislative intention that such a mortgagee is a successor in title to the owner. Such a person becomes a statutory owner in its own right. If the submission was correct, it would mean that any person, who is at law or in equity, entitled to receive the rents and profits of the land, irrespective of the nature of the interest held, is to be regarded as a successor in title to the owner. I consider it unlikely that the legislature had this intention.

  7. I answer Question 1 no.

QUESTION 2

Non-Contracting Owner

Is Gardez, by virtue only of becoming a mortgagee in possession, capable of becoming a non-contracting owner in relation to the building contract between Railway and the builder within the meaning of s 3, s 18D(1A) and s 99(2A) of the Act?

  1. Gardez argues that when it became a mortgagee in possession of the land it thereby became a non-contracting owner under the definition in s 3(1) in relation to the building contract, and that under s 18D(1)(A), it is entitled to the same rights that Railway as a party to the building contract had in respect of the statutory warranties.

  2. Its further contention (which is the subject of Question 3), is that under s 99(2)(A), it is entitled to claim under the policy because it is taken to have (and to always have had) the same benefit as Railway under the policy. Gardez correctly does not put that it is a successor in title to a non-contracting owner.

  3. The insurer puts that the definition of ‘non-contracting owner’ in relation to a contract to do residential building work directs attention to the person that is the owner of the land when a third person and the builder enter into a contract to do residential building work on the land to which the owner is not a party, and to a successor in title to such a non-contracting owner.

  4. It puts that the Act does not provide any other pathway for a person to become a non-contracting owner in relation to a contract to do residential building work on land that the person did not own when the contract was entered into. I uphold the insurer’s submission.

  5. The definition of ‘non-contracting owner’ in s 3(1) applies to the individual, partnership or corporation that is the owner of the land but is not a party to the contract. This is clearly directed to the state of affairs at the time the contract was entered into. The Act contains no provision whereby a person who later becomes an owner (within the expanded definition) obtains the benefits of the statutory warranties other than by succeeding to the title of the owner, and there is no good reason why it should. The non-contracting owner and its successors in title will get those benefits.

  6. Moreover, both the expanded definition of owner and the definition of non-contracting owner were inserted (urgently) into the Act by the Home Building Amendment (Warranties and Insurance) Act 2010 NSW (No 53 of 2010) to overcome the effect of Ace Woollahra Pty Ltd v Owners – Strata Plan 61424 (2010) 77 NSWLR 613; [2010] NSWCA 101 (Ace Woollahra). Ace Woollahra held that the benefit of the statutory warranties were available only to the person who contracted with the builder to do the residential building work and to that person’s successors in title, but did not extend to a person who owned the land on which the residential building work was done but who was not a party to the contract with the builder.

  7. So much appears from the following extracts from the second reading speech for the Home Building Amendment (Warranties and Insurance) Bill 2010 on 23 June 2010:

The Hon. MICHAEL VEITCH (Parliamentary Secretary) [5.42 p.m.], on behalf of the Hon. Peter Primrose: I move:

That this bill be now read a second time.

The Government is today introducing the Home Building Amendment (Warranties and Insurance Bill) 2010. The bill is being introduced urgently to overcome the effect of a recent Court of Appeal decision in the case of Ace Woollahra v The Owners—Strata Plan 61424 and Building Insurers' Guarantee Corporation. That decision has created considerable uncertainty in relation to the statutory warranty and home warranty insurance schemes, and has cast significant doubt on whether the scheme protects all home owners as intended. The bill will amend the Home Building Act to clarify the entitlements of home owners to statutory warranties and home warranty insurance, where loss is suffered due to defective residential building work. The bill will change the Act to protect home owners who have building work done, as well as subsequent purchasers of homes and apartments in circumstances where it now appears no benefits are available.

The Home Building Act provides two forms of protection against defective residential building work to home owners who engage builders to carry out building work and those who buy a home from such persons. First, it gives home owners a statutory warranty against defective building work undertaken by the builder. These warranties are implied into contracts to carry out residential building work. The home owner can pursue legal action against the builder for the work required to fix the defect. Secondly, the Act is intended to allow the home owner to claim under insurance for rectification of the work or monetary compensation. These benefits were always intended to be available to the person who owned the land on which the building work was done, as usually that person would suffer any relevant loss. As it was expected that only the landowner would be the person entering into the contract with the builder, the Act did not specify or identify the person contracting with the builder. The intended beneficiary of the schemes was merely referred to as "the person obtaining the benefit of the statutory warranties" or, for insurance, "the person on whose behalf the work was done".

These benefits are also extended to any person who is a subsequent purchaser or "successor in title" for a period of up to a possible maximum of seven years. So, in these cases, the home owner and any subsequent purchaser will get the benefits of the Act. However, in some instances the contract with the builder might be entered into by a person who is not in fact the landowner. For example, a husband might enter into a contract with a builder to undertake residential building work on land owned not by him but by his wife. Similarly, a company that owns land might be developing it into a residential complex, but the contract to do the building work or to have the work done by a builder is entered into by a subsidiary of the company. It was always thought that the benefits of the Act would still flow to a landowner even if someone else was the contracting party. I seek leave to incorporate the remainder of the second reading speech in Hansard.

  1. The legislature did not have in mind that a subsequent owner within the expanded definition who was not a successor in title to the owner at the time of the contract would get the direct benefit of the statutory warranties.

  2. It should be borne in mind that Gardez as mortgagee in possession does get an indirect benefit because it is able to sell the land to a person who will become a successor in title and who will get the direct benefit of the statutory warranties. There is no remedy vacuum.

  3. I answer Question 2 no.

QUESTION 3:

If Gardez is a non-contracting owner in relation to the building contract, does s 99(2A) provide cover for the benefit of Gardez in relation to work done prior to 27 June 2014 in circumstances where Railway is a developer in relation to that work and therefore is not entitled to the benefit of cover under s 99(2)(a) and the policy?

  1. Question 3 does not arise.

  2. However, if Gardez was a non-contracting owner in relation to the building contract and not a successor to Railway’s title, it would not have obtained any right to make a claim under the policy against the insurer anyway, for the following reasons.

  3. No doubt, in light of s 99(2)(a) which provides that a developer need not be insured, the policy expressly does not cover a claim by a developer.

  4. The effect, according with the scheme of the Act, is that owners are covered whether they contract or not, whereas developers themselves are not covered. However, the benefit of cover will pass to owners who are successors in title to developers.

  5. Under s 99(2A), a provision of a contract of insurance providing cover for the benefit of a person on whose behalf work is done on land is to be read as providing (and to have always provided) for the same benefit in relation to a non-contracting owner of the land.

  6. Where the person on whose behalf the work is done is a developer, as in this case (it is common cause that Railway is a developer), and as will often be the case, the benefit is not being able to make a claim, but rather to pass the benefit of the statutory warranties and insurance cover to subsequent owners. That is the benefit Gardez, if it was a non-contracting owner, would have under s 99(2A) in this case where the contract of insurance provides cover for the benefit of a person on whose behalf work is done and that person is a developer. This accords with the scheme of the Act. Correspondingly, it would be discordant with the scheme of the Act for a non-contracting owner to have cover where the contracting party is a developer.

QUESTION 4:

Is Gardez a person on whose behalf work was done pursuant to the side deed, or alternatively pursuant to the building contract and therefore, upon becoming a mortgagee in possession on 27 June 2014, a developer in relation to the work done prior to 27 June 2014 within the meaning of s 3A(1) of the Act?

  1. This question is intended to expose for examination the insurer’s contention that Gardez is a developer under ss 3A(1) and (2) because it is a corporation on whose behalf the residential building work was done and 4 or more of the proposed dwellings came to be owned by it (under the extended definition of ‘owner’ under s 3(1)) when it took possession (hence the inclusion of the word ‘therefore’ in the question).

  2. The insurer puts that upon entering into the side deed with the builder, Gardez became a person on whose behalf building work was being done under the provisions of that instrument because under cl 2.3(a) of the side deed, the builder undertook to Gardez to observe and perform all of the builder's obligations under the building contract, including to execute and complete the works required by the building contract, and to comply with the statutory warranties under s 18B of the Act in accordance with cl 1 of the building contract.

  3. It puts that upon Gardez exercising its Step-in Rights, it became a person on whose behalf building work was being done under the provisions of the building contract because under cl 4.1(a) of the side deed, when Gardez took possession of the land as mortgagee in possession, it became entitled to exercise and enforce all of the rights, powers, discretions and remedies and to perform all of the obligations of Railway under the building contract, as though it was a party to the building contract instead of Railway.

  4. Gardez puts that it was never a person on behalf of whom the work was done because it was not a contracting party to the building contract and the side deed did not make it one. It puts that it did not become a party either when it exercised its right to take possession.

  5. In my view, Gardez is correct. It took security over Railway’s interest in the building contract, and the side deed contained a comprehensive mechanism for it to realise that security. Recital B of the side deed makes this clear. Clause 2.3 is a separate undertaking by the builder to Gardez to comply with its obligations under a contract with someone else (Railway). Clause 4.2 contemplates novation as a possibility, but this did not happen in the present case. Clause 4.1 also does not result in Gardez being the contracting party under the building contract. To the contrary, where the clause uses the words “as though the Enforcing Party was a party to the Building Contract instead of the Developer” it makes it clear that Gardez was not becoming a party.

  6. In addition, I do not consider that the circumstances described in s 3A(2)(a) are present. It seems to me that the section contemplates that the individual, partnership or corporation will be an owner while the work is being done, or that it will become an owner when the dwellings come into existence. This conclusion is consistent with the way in which I consider s 3A(1A) is to be construed, a matter which is dealt with below.

  7. I answer Question 4 no.

QUESTION 5:

Is Gardez, by virtue only of becoming a mortgagee in possession on 27 June 2014, deemed to be a developer in relation to the work done prior to 27 June 2014 by s 3A(1A) of the Act?

  1. This question is intended to expose for examination the insurer’s contention that Gardez is a developer under s 3A(1) because, when as mortgagee in possession (it became an owner within the expanded definition in s 3(1)), the work which had to that date been done is deemed, by virtue of s 3A(1A), to have been done on its behalf as owner.

  2. It is not in dispute that no work has been done since Gardez took possession and that all the defective and incomplete work was done before it did so.

  3. The issue which divides the parties is whether, on its true construction, s 3A(1A) deems work to be done ‘on behalf of an owner’, only where the work was done at a time when the owner had that status (as Gardez contends), or operates to deem work done before the owner acquired that status, nevertheless to have been done on its behalf (as the insurer contends).

  4. Gardez argues that where ss 3A(1) and 3A(2) use the words ‘is done’, s 3A(1A) uses the words ‘is a developer in relation to the work’, and s 3A(2) uses the words ‘are or will be owned’, they make it clear that no retrospectivity is intended.

  5. It puts that there are ‘substantial reasons’ why retrospectivity should be avoided, including, that every person who comes to ‘own’ 4 or more dwellings would become a ‘developer’.

  6. For its part, the insurer argues that the construction for which Gardez contends requires a temporal limitation to be placed on the operation of s 3A(1A) that is not apparent from the ordinary meaning conveyed by the text of the section.

  7. It puts that Gardez’s construction would lead to anomalous and inconvenient results which would run counter to the evident consumer protection and anti-avoidance purposes of the developer provisions of the Act. It cites as an example, a person becoming an owner of land on which residential building work has been done in connection with a building, residential development, retirement village or disabled accommodation, but the work is incomplete at the time and is completed subsequently. It puts that the owner would be a developer only in relation to that part of the work that was done after it became an owner, but not the earlier work, all of which may have been a necessary and integral part of the residential building work done as part of a development, and that this would mean that for the purpose of determining the scope of the statutory warranties available to a successor in title under s 18C(1), it would be necessary for the successor in title to establish what work had been done before and after the owner/developer became an owner of the land, and that the loss or damage the successor in title has suffered was caused by a breach of the statutory warranties with respect to work done after, rather than before, the owner/developer became an owner of the land.

  8. It puts that this would create practical difficulties for a successor in title to an owner/developer in attempting to obtain recourse for shoddy building work and would run counter to the consumer protection objectives of the Act.

  9. It puts that the construction would create a new incentive for developers to attempt to structure their projects to avoid or minimise their statutory warranty and insurance obligations, which would go some way towards defeating the purpose served by the insertion of s 3A(1A).

  10. For the reasons that follow, I prefer the construction contended for by Gardez.

  11. I consider that the words of the section do not indicate any retrospective operation. The most natural meaning, taking into account the purpose of the section, and the context of the phrase, is that it relates to something done during the period to which the section refers, which I consider to be when the work is done: see Suntory (Aust) Pty Ltd v Commissioner of Taxation [2009] FCAFC 80 at 37.

  12. Section 3A, before the amendment, and as construed in accordance with Ace Woollahra, applied to work done under or pursuant to an existing contractual relationship. This meant that there was a lucuna.

  13. An individual, partnership or corporation was a developer, relevantly, if residential work was done on its behalf in connection with a residential development where 4 or more of the existing or proposed dwellings were, or were to be owned, by it. Given the holding in Ace Woollahra, these requirements would not be satisfied if the owner was not the contracting party because the work would not then be done on its behalf. Section 3A(1A) was inserted by the Home Building Amendment Act 2011 (NSW).

  14. The amendment was intended to close this lacuna by deeming (for the purpose of determining who is a developer in relation to the work) the work to be done on behalf of the owner of the land in addition to any person on whose behalf it was actually done.

  15. So much is clear from the following extract from the Second Reading Speech on 19 October 2011 for the Home Building Amendment Bill 2011 (NSW):

The Hon. GREG PEARCE (Minister for Finance and Services, and Minister for the Illawarra) [12.10 p.m.]: I move:

That this bill be now read a second time.

The bill will amend the Act to protect homeowners who are currently uncertain of their ability to pursue their builder for faulty or incomplete work as a result of an unexpected court decision in 2010 which created a loophole in the current definition of "developer".

Prior to the 2010 Court of Appeal decision, this definition had been operating effectively. It ensured that the appropriate people and organisations were considered to be developers for the purposes of the legislation, and therefore subject to the legislative requirements for developers.

It did this by ensuring that a developer was a person or organisation that owned, or would own, four or more units in the development and that the work was done on their behalf.

One of the most important requirements in the Act for developers is that they assume the same level of responsibility for the statutory warranties as the builder. This gives a homeowner the greatest chance of recovering any losses from defective or incomplete work.

However, in May 2010, the Court of Appeal took a narrow view of the Act's definition of "developer" in its decision. It effectively found that in order for the work to be done on behalf of the developer, the developer must have been in contract with the builder.

This does not recognise that, in many arrangements entered into by developers, the party that owns the land—and on whose behalf the work is done—is not necessarily the party who enters into the contract with the builder.

The most common example of where this happens is in joint venture arrangements, where one organisation or person owns the land, and the other enters into the building contract.

Under these circumstances, if the owner of the land has to also enter into the building contract in order to be considered a developer, many homeowners risk not being able to pursue the developer for a breach of the statutory warranties. This would severely reduce the homeowner's chances of being able to recover their losses for defective or incomplete work.

Accordingly, the Government is moving swiftly to rectify this situation for affected homeowners by amending the definition of "developer" in the Act. The revised definition of "developer" will ensure that the owner of the land who also owns, or will own, four or more of the units in the development, is considered to be a developer, regardless of whether they entered into the contract with the builder.

As a result, developers will continue to assume the same level of responsibility for the statutory warranties as they did before the Court of Appeal decision.

This amendment is to have retrospective effect, but not so as to affect any finalised litigation or claims or any claims or litigation currently underway.

  1. The earlier amendments referred to above had extended the definition of owner. I can discern no legislative intention that a person would become a developer and be liable in that capacity because at some time after the contract, or after the work was done (even years after), it became an owner under the extended definition because it exercised rights which gave it an entitlement to the rents and profits of the land in any capacity. Section 3A(1A) was directed to persons seeking to escape their obligations as a developer by having the land owned by one person and the contract entered into by another.

  2. I answer Question 5 no.

CONCLUSION

  1. The conclusion is that Gardez has not established any entitlement to claim against the insurer.

  2. It seems to follow that the proceedings are to be dismissed.

  3. I will hear the parties on any issues that remain, including as to costs.

  4. The exhibits are to be returned.

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SCHEDULE

Background

A   The Builder and the Developer have entered, or propose to enter, into the Building Contract.

B   The Developer has granted, or proposes to grant, the Security (including over the Developer's interest in the Building Contract) to the Lender in connection with funding the Developer's obligations under the Building Contract.

…

Dictionary & interpretation

Defined terms

In this document:   

Building Contract means the agreement, dated on the Building Contract Date specified in the Reference Schedule between the Developer and the Builder in connection with works relating to the development of the Site for the Approved Development.

Corporations Act means the Corporations Act 2001 (Cth).

Default Notice means, in respect of a Developer Default, a written notice from the Builder to the Developer given in good faith and on reasonable grounds, referring to this document and stating:

(a)   which Developer Default has occurred and whether it is a Remediable Default;

(b)   if a Remediable Default, the Remedy Period and the steps claimed necessary to remedy the Developer Default;

(c)   if a Non-Remediable Default:

(i)   the amount (if any) claimed payable or other action required as reasonable compensation for the Developer Default, having regard to the nature and extent of the Developer Default; and

(ii)   the Remedy Period for that Non-Remediable Default;

(d)   if the Developer Default is an Insolvency Event in respect of the Developer, the Remedy Period applicable to the Insolvency Event in respect of the Developer; and

(e)   the Default Rights (if any) that the Builder proposes to exercise when the Remedy Period ends and the relevant clauses under the Building Contract and provisions under the Security of Payment Act giving rise to those Default Rights.

Default Right means any right, power, discretion or remedy (whether under the Building Contract or otherwise at law) to:

(a)   avoid, terminate, rescind, treat as terminated or repudiated, or otherwise bring to an end, the Building Contract; or

(b)   stop or suspend performance of obligations under the Building Contract or the carrying out of the Works; or

(c)   to release the Developer or the Builder (as the case may be) from its obligations under the Building Contract; or

(d)   bring an action for damages against the Developer in relation to the Building Contract.

Enforcing Party means the Lender or any External Administrator, agent or attorney appointed by the Lender or acting under or in connection with a Security.

Facility Agreement means the loan agreement between the Lender and the Developer executed contemporaneously (more or less) with this Agreement, which Facility Agreement is a Finance Document.

Notice means a notice, demand, consent, approval or communication given in accordance with clause 9.

Power means any right, power, discretion or remedy of an Enforcing Party under this document, a Security or applicable law.

Secured Property means any property or asset the subject of a Security.

Security means:

(a)   the real property mortgage granted over the Site by the Developer to the Lender dated on or about the date of this document;

(b)   the fixed and floating charge to the Lender over all assets and undertaking of the Developer dated on or about the date of this document; and

(c)   any other present or future Security Interest granted by the Developer to the Lender which secures amounts, liabilities or obligations under a Finance Document.

Security Interest means any:

(a)   'security interest' as defined in the PPS Law;

(b)   security for payment of money, performance of obligations or protection against default (including a mortgage, bill of sale, charge, lien, pledge, trust, power or title retention arrangement, right of set-off, assignment of income, garnishee order or monetary claim and flawed deposit arrangements); and

(c)   thing or preferential interest or arrangement of any kind giving a person priority or preference over claims of other persons or creditors with respect to any property or asset, and includes any agreement to create any of them or allow them to exist.

Step-in Notice means a written notice from the Lender to the Builder stating that an Enforcing Party is stepping-in to the Building Contract for the purposes of this document.

Step-in Period means the period from (and including) the earlier of:

(a)   the date that the Lender gives a Step-in Notice to the Builder; and

(b)   the date an Enforcing Party takes possession of the Building Contract, the Site and the Works, to (but excluding) the earlier of:

(c)   receipt by the Builder of a Step-out Notice; and

(d)   the date on which the Building Contract is novated as contemplated in clause 4.2.

Step-in Rights means any rights or powers of an Enforcing Party pursuant to the Securities to:

(a)   appoint an External Administrator to the Developer or to some or all of the Secured Property;

(b)   enforce a Security in court;

(c)   take possession as chargee or Lender of some or all of the Secured Property; and

(d)   exercise Powers consequent on exercise of any of the above rights.

…

2.   Builder consent to Security and undertakings

2.1   Consent and agreement

The Builder consents to the creation of each Security, acknowledges that the Developer's interest and rights in the Building Contract are Secured Property, and agrees that:

(a)   neither the creation of any Security, nor the exercise of any Step-in Rights or other Power will of itself:

(i)   breach, or constitute a Developer Default under, the Building Contract;

(ii)   entitle the Builder to exercise any Default Right (and despite any other provision of the Building Contract, the Builder must not exercise a Default Right arising in those circumstances); or

(iii)   give the Builder any additional or different rights under the Building Contract;

(b)   entry into this document satisfies any requirement under the Building Contract for the Builder to consent in respect of the Developer's entry into and performance of the Security;

(c)   the parties to any Security may at any time amend, novate, supplement or replace that Security without the Builder's consent;

(d)   it will not interfere with or act to disrupt any exercise of an Enforcing Party's Powers under this document, the Building Contract or a Security, subject to and in accordance with the terms of this document;

(e)   nothing in this document obliges an Enforcing Party to remedy any Developer Default, exercise any Step-in Rights, take action to complete the Works or provide financial accommodation in connection with the Building Contract, or to procure that any of these things occur;

(f)   in accordance with the Security the Lender or any Enforcing Party may exercise all or any of the rights and powers, and perform all or any of the obligations, of the Developer under or in relation to the Building Contract to the exclusion of the Developer (including keeping custody and enforcing any Performance Security);

(g)   the Lender has the benefit of all representations and warranties made or given by the Builder under the Building Contract; and

(h)   the Lender assumes no liability to the Builder in connection with the Building Contract except in the circumstances expressly contemplated in this document.

…

2.3   Builder general undertakings

The Builder undertakes to the Lender (unless the Lender otherwise consents in writing) to:

(a)   subject only to clause 3.5, observe and perform its obligations under the Building Contract;

…

4.      Step-in and Step-out

4.1   Builder acknowledgment and undertaking

If an Enforcing Party exercises its Step-in Rights or gives the Builder a Step-in Notice, the Builder:

(a)   acknowledges and agrees that the Building Contract will remain in full force and effect and an Enforcing Party will be entitled to exercise and enforce all rights, powers, discretions and remedies, and perform all obligations of the Developer under or in connection with the Building Contract, as though the Enforcing Party was a party to the Building Contract instead of the Developer;

(b)   without limiting the Developer's liability (who continues to be responsible to perform its obligations under the Building Contract), acknowledges and agrees that subject to clause 5.2, no Enforcing Party is or will be liable or will be taken to have assumed liability or responsibility, for any obligation or liability of the Developer under the Building Contract by reason only of:

(i)   entry into this document or the Security;

(ii)   the exercise of Step-in Rights or other Powers in accordance with the Security; or

(iii)   the exercise of the Developer's rights, powers, discretions or remedies under the Building Contract; and

(c)   undertakes to the Lender to:

(i)   duly and punctually perform all of its obligations under the Building Contract as if the Enforcing Party was a party to the Building Contract in the place of the Developer; and

(ii)   to not take any action detrimental to an Enforcing Party's rights under the Building Contract or the Security.

4.2   Novation of Building Contract

If an Enforcing Party exercises its Step-in Rights or gives the Builder a Step-in Notice, the Builder:

(a)   on request from the Lender, undertakes to novate the Building Contract (including all of the Developer's rights, duties and obligations under the Building Contract) in favour of an Enforcing Party, a subsidiary of an Enforcing Party, a purchaser of the Site or any other person nominated by the Lender who has the necessary financial and other resources to assume the Developer's rights, duties and obligations under the Building Contract (Novatee) by entering into a deed with the Developer, the Lender (and/or an Enforcing Party) and the Novatee which provides that:

(i)   the Novatee will be liable to the Builder for the performance of all of the Developer's obligations under the Building Contract (whether those obligations arose before or after the date of novation) including payment of unpaid Certified Costs and (subject to being duly certified by the Quantity Surveyor prior to payment) unpaid Uncertified Costs detailed with any Default Notice issued in accordance with clause 3.1; and

(ii)   the Builder will complete the Works and continue to perform the Building Contract for the benefit of the Novatee in accordance with the Building Contract as if the Novatee was a party to the Building Contract in the place of the Developer with the Building Contract to continue in full force and effect as if the Developer Default giving rise to the exercise of Step-in Rights had not occurred; and

(b)   if, subsequent to a novation under clause 4.2(a), the Lender or the Novatee (if it is the Lender or a subsidiary of the Lender) gives the Builder a notice requesting a further novation of the Building Contract, the Builder undertakes to the Lender to novate the Building Contract (including all of the Novatee's rights, duties and obligations under the Building Contract) in favour of a purchaser of the Site or any other person nominated by the Lender who has the necessary financial and other resources to assume the Novatee's rights, duties and obligations under the Building Contract (New Principal) by entering into a deed with the Novatee, the Lender (and/or an Enforcing Party) and the New Principal which provides that:

(i)   the New Principal will be liable to the Builder for the performance of all of the Novatee's obligations under the Building Contract arising for performance on or after the date of novation;

(ii)   the novation will not affect any liability owed by the Novatee to the Builder prior to the novation taking effect; and

(iii)   the Builder will complete the Works and continue to perform the Building Contract for the benefit of the New Principal in accordance with the Building Contract as if the New Principal was a party to the Building Contract in the place of the Novatee.

(c)   The Builder must give the Lender, any Novatee and any New Principal all reasonable assistance (including entering into documents) to effect any novation contemplated in this clause 4.2.

4.3   Developer acknowledgement

The Developer acknowledges:

(a)   that the Builder may rely on any Step-in Notice in accepting any exercise by an Enforcing Party of any of the Developer's rights or powers under the Building Contract; and

(b)   any action under the Building Contract pursuant to an exercise of Step-in Rights will be deemed an action of the Developer.

…

5.1   General exclusion of liability

Except to the extent that the Lender expressly agrees otherwise in this clause 5, the Builder and the Developer agree that no Enforcing Party:

(a)   assumes any liability directly or indirectly whatever to the Builder or the Developer in respect of any Loss arising in any way from the Lender's refusal to provide financial accommodation to the Developer;

(b)   assumes any liability directly or indirectly whatever to the Builder under the Building Contract or to any other person with an interest under the Building Contract; or

(c)   is or will become liable to pay, or procure payment to, the Builder, the Developer or any other person of any amount in connection with the Building Contract, a Works Contract or the Works.

….

5.3   Liability after Step-in Period

The Builder and the Developer agree with the Lender that neither the Lender nor any other Enforcing Party will be responsible or liable for any obligation or liability of the Developer to the Builder:

(a)   which accrues or is required under the Building Contract to be performed after a Step-in Period ends (except in accordance with this document if and to the extent that a new Step-in Period commences); or

(b)   while a default or breach by the Builder under the Building Contract subsists which entitles the Developer to issue a show cause notice under clause 39 of the Building Contract.

Decision last updated: 28 April 2016

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Cases Cited

9

Statutory Material Cited

7

Gibb v Federal Commissioner of Taxation [1966] HCA 74
Moreton Bay Regional Council v Mekpine Pty Ltd [2016] HCA 7
Gibb v Federal Commissioner of Taxation [1966] HCA 74