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:
- 6.5 years and see whether an occupancy permit or certificate of final inspection was issued; or
- if not, then look back 7 years to see whether a building permit was issued; or
- 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