By Russell Cocks, Solicitor

First published in the Law Institute Journal

The current domestic building warranty insurance regime came into force 20 years ago and it remains largely a mystery to most property lawyers.

Donald Rumsfeld was referring to weapons of mass destruction when he made his infamous comment about ‘knowns, known unknowns and unknown unknowns’ but he may just as well have been referring to the owner builder warranty insurance scheme that has plagued Victorian conveyancing lawyers for 20 years. Whilst insurance is generally a matter relating to the quality of a property and not a matter going to title, it is the draconian consequences of getting the insurance situation wrong that makes this issue one of the great disasters of conveyancing. Quality issues do not generally create a right of avoidance but failure by the vendor to comply with the owner builder insurance obligations does allow the purchaser to avoid, an outcome that can have disastrous consequences for the vendor’s adviser.

KNOWN

What is known about the scheme is that an owner builder who performed building works in the 6.5 years prior to the sale is required to include a Condition Report in relation to those works in the contract and (if the works exceeded $16,000) obtain warranty insurance. It is important to note that the obligation to provide the Condition Report is absolute and does not depend upon the cost of the works.

KNOWN UNKNOWN – what works?

But knowing that the scheme applies to building works creates the first unknown – what building works trigger the obligation?

Section 137B(2) Building Act creates the requirement if a vendor ‘constructs’ a building and the definition of ‘construct’ (s 137B(7)) includes repair or alteration of the building. Clearly adding a room, for instance, would be construction and the requirement arises. But what about essentially cosmetic works that might involve work that could be described as ‘home handyman work’, such as retiling a bathroom or moving a doorway? Where do we draw the line?

A convenient threshold might be to differentiate between works that require a building permit and works that do not, although that arbitrary line is itself somewhat problematic. Essentially, substantial works require a permit and cosmetic works do not. But the Act, by contemplating an obligation even when a building permit has NOT issued, makes it clear that the requirement does relate to non-permit works and so we must presume that this unknown is in fact any and all works undertaken on the home – any repairs or alterations no matter how minor.

UNKNOWN UNKNOWNS – when?

Harder still is the problem of determining when the works were performed.

By s 137B(7) the Act provides a series of alternatives for determining when the 6.5 year period, known as the ‘prescribed period’, commenced. Starting from the contract date, the vendor must look back either:

1. 6.5 years and see whether an occupancy permit or certificate of final inspection was issued; or
2. if not, then look back 7 years to see whether a building permit was issued; or
3. if neither of the above, then look back 6.5 years to see whether the owner has certified that construction had commenced.

Works performed during any of those periods trigger the requirements. The first two alternatives are based on an objectively determined event but the third is a very subjective basis for determining the prescribed period and adds to the prevailing sense of unreality that surrounds the vendor’s obligations in relation to owner builder insurance.

Tip Box

Whilst written for Victoria this article has interest and relevance for practitioners in all states.

Owner Builder works may require a Condition Report and warranty insurance

Even cosmetic works may trigger requirement

For works in preceding 6.5 years

By Russell Cocks, Solicitor

First published in the Law Institute Journal

A recent case has considered the legal basis of short term holiday rental arrangements

Disruptive innovation is a term used to describe new products in an existing market that create a new market and a new value network and eventually displace established market leaders. Whilst it is a term of recent invention used to describe elements in the modern economy, the T Model Ford created disruptive innovation in the transport market over a century ago, eventually displacing the horse and cart.

Regulation of Uber, a disruptive innovation in the passenger transport market, is occupying the attention of government and the media at the moment and Airbnb is a fellow traveller, disrupting the holiday accommodation market. Whilst recent inventions of the modern economy, it is reassuring to know that these disrupters are, in the final analysis, bound by black letter property law.

Swan v. Uecker [2016] VSC 313 is a decision by Croft J. in the Victorian Supreme Court by way of an appeal from VCAT. The landlord had applied to VCAT for an order terminating the lease on the basis that the tenant had breached the lease by entering into a contract with Airbnb and subsequently accepting ‘guests’ at the property. The landlord argued that by doing so the tenant had subleased the premises in breach of the terms of the lease, thereby entitling the landlord to terminate the lease However VCAT dismissed the application on the basis that the tenant had retained the right to access the premises during the period of the guest’s stay and therefore had given the guest a license to occupy the premises, rather than a sub-lease, and that the licence did not amount to a parting with possession such as to constitute a breach of the lease.

Indeed, the contract between the tenant and Airbnb described the guest’s right as a licence but Croft J., adopting a substance over form approach, confirmed that merely describing an agreement as a licence did not save it from being a lease if the ‘touchstone’ of a leasing relationship, exclusive possession, passed to the guest. The tenant argued that the short nature of the typical guest stay of 3 to 5 days made that possession akin to the rights of a hotel guest but Croft J. rejected the analogy and held that the length of time associated with exclusive possession was irrelevant, concluding that exclusive possession for one day may be sufficient to establish a lease.

Croft J. was careful to caveat that this decision should not be seen as authority for the proposition that an Airbnb guest will always be held to be a tenant, rather than a licensee. If the rights of the guest fall short of exclusive possession of the leased property then it is safe to say that the guest will have a licence, rather than a lease, both as to form and substance. This would have been the case in Swan if the guest had have adopted the option of occupying one room in the property, rather than taking possession of the entire property. It might also have been the case if the Airbnb contract and advertising had have reserved to the tenant the right to access the property at any time during the occupancy of the guest, although the market acceptability of such an arrangement is problematic.

The importance of the decision is to confirm that disruptive or not, these innovations remain subject to established legal principles.

Tip Box

Whilst written for Victoria this article has interest and relevance for practitioners in all states.

Airbnb rental arrangements are subject to normal common law leasing principles.

Exclusive possession will generally mean that the arrangement is a lease rather than a licence.

By Russell Cocks, Solicitor

First published in the Law Institute Journal

Issues of contamination remain an area of uncertainty for property lawyers.

The sale of real estate occasionally raises the issue of contamination affecting the land and there have been few cases to guide practitioners in dealing with such matters.

Examples of common contaminates in a domestic or commercial environment are asbestos, in homes and outbuildings or commercial premises, and petroleum products in land previously used for commercial purposes but now perhaps desired to be used for residential purposes.

The concept of ‘affecting the land’ calls attention to the vendor disclosure obligations set out in s 32 Sale of Land Act but a careful consideration of those provisions fails to reveal any statutory obligation, in the absence of a formal notice relating to the contamination, to disclose the existence of contamination. Whilst the relatively recently introduced s 48A Sale of Land Act may have extended remedies for breach of the Act, establishing a breach may itself prove difficult.

Contamination may therefore be described as a defect, perhaps a latent defect, but certainly a defect as to quality and not as to title. The underlying principle in relation to quality defects remains caveat emptor and a purchaser who discovers contamination after entering into the contract or, indeed, after settlement may have limited recourse against the vendor.

One exception to caveat emptor is misrepresentation, either fraudulent, negligent or innocent, but fraudulent misrepresentation is notoriously difficult to prove and the other varieties each have their own problems of proof. Statutory misrepresentation, in the form of a breach of the Australian Consumer law may well hold more fertile grounds but the average purchaser of a domestic or small commercial site will often find the costs of such proceedings forbidding.

Metropolitan Fire and Emergency Services Board v. Yarra City Council [2015] VSC 773 involved combatants which were anything but the ‘average citizen’. These parties were able to fund a hearing that occupied 22 sitting days, 2 Senior Council and 6 Junior Counsel to determine whether Yarra Council was responsible for contamination on land that had been occupied by the former Richmond City Council and came into the hands of the Board after 100 years of use as a municipal tar pit and subsequently a quarry and an abattoir. The Environment Protection Authority had issued a Clean Up Notice and the Board sought damages for the cost of the clean up from the Council on the basis that the Council had caused or permitted the pollution. Whilst the Board advanced many arguments to support its claim, only an argument based on Council’s liability under s 62A Environment Protection Act was successful.

It is the other, unsuccessful, arguments that are of more interest to property lawyers. These were, in summary:

Statutory Duty – the Board was not entitled to rely on the Council’s breach of s 45 Environment Protection Act as that was the province of the EPA;

Planning Duty – despite the Council being the responsible authority for planning, this did not create any additional duty to the Board;

Non-Pollution Duty – this was couched in terms of a tortious duty and rejected on the basis that the loss was not foreseeable, but reference was made to the underlying principle of caveat emptor, the touchstone of property lawyers;

Demolition Duty – again, based on the Council’s various statutory duties;

Disclosure Duty – which sounds like a property law argument but was also couched in tortious terms and relied on the case of Noor Al Houda Islamic College v. Bankstown Airport Ltd [2005] NSWSC 20 involving non-disclosure of asbestos. This argument was rejected largely because the Court was satisfied that the Board had been aware of many reports relating to the contamination and had given release and indemnities to its vendor, the State of Victoria.

The ratepayers of the City of Yarra may well feel hard done by as they have been fixed with responsibility for a very expensive clean up of pollution caused by the City of Richmond and the City did not even receive the proceeds of sale as the State Government had revoked the Crown Grant and sold the land to the Board, wisely including releases and indemnities in that contract.

Tip Box

Whilst written for Victoria this article has interest and relevance for practitioners in all states.

A vendor’s duty of disclosure in relation to contamination is based on the Environment Protection Act.