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Article 2 - Law Protects Home Buyers

Home buyers have been specially protected in this State of New South Wales by a succession of Government policy initiatives mainly found in the Home Building Act (1989).

There are three arms to this policy in the present decade. Extensive consumer contract protection, licensing of residential builders and tradesmen, and requirements for home owners warranty insurance.

In this article we look at the first of these strategies: the provision of consumer safeguards for those entering into their most significant consumer contract, purchasing a house from a builder.

The Home Building Act (1989) and its regulations sets up four avenues of protection:

1. incorporation of warranties and conditions in all contracts for domestic building above $12,000 in value
2. the requirement that a 12-point checklist be included with all contracts of such value
3. the stipulation that arbitration and caveat lodgement cannot be included in building contracts
4. a cooling-off period.

The essential elements of the home building contract

The contract must be in writing and it must contain sufficient reference to the plans, specifications and drawings which will be necessary to build the house. It must contain the price of the construction and warnings in respect of variations which may occur to the price in certain circumstances. It must have both a Home Owners Warranty policy attached to it and an explanatory guide as to the consumer protection which the HBA offers. It must also contain the 12 checklist items which are intended to be completed at or before the execution of the contract. In addition the Act provides that there will be implied certain standards of workmanship and fitness for purpose in every residential building contract.


Contract terms barred by the Act

There are certain contractual terms which are now excluded from building contracts. The building contract must not allow a charge over the land in favour of the builder without an order permitting it from a court or tribunal. The contract must not contain an arbitration agreement. The contract cannot provide for a deposit payment in excess of 10% of the value for a project under $20,000 or in excess of 5% in respect of work of greater value. Contract terms which have the effect of limiting the protections contained in the Home Building Act are void.

The limitations of the consumer security scheme

The limitation of this consumer protection scheme is that it dependents on consumers to be aware of their rights and to be quick to enforce them. Government cannot contract on behalf of consumers. Freedom of contract is an important ingredient in creating the efficiencies of the market economy. If a consumer does not take care to check that he or she has been provided with all the elements of the consumer benefits conferred by statute, the likelihood is that damage and loss will be suffered. Insurance known as Home Owners Warranty insurance is in effect very limited in its application. For incomplete building works it exists for only 12 months after completion of the work; for non-structural building defects it exists for only two years and for structural defects the limitation period is six years after completion.

But it must be remembered that this insurance policy can only be relied upon if the original builder is no longer in existence, or cannot be found, or is insolvent. Otherwise the home owner will be forced to proceed against the builder in the Consumer Trader and Tenancy Tribunal or in the Courts depending upon the amount of the claim. For these reasons all home builders should have early access to a lawyer skilled in this field of building and construction. The earlier construction legal problems can be resolved the less is lost in legal fees, - which win lose or draw, - are never fully recoverable.

Paradoxically a higher priced expert lawyer may prove cheaper tin the long run since he will be aware of the great costs of litigation in building and construction matters. In such disputes much of the evidence of necessity must be given and challenged by expert building consultants from fields such as geo-technics, concrete analysis, architecture or quantity surveying. These experts must be paid not only for the research which underlies their reports but for the time they must spend in court waiting to give evidence, and giving their evidence and being cross-examined in relation to other expert reports.


Typical problems experienced by home buyers

Home owners make two catastrophic mistake both of which could be easily avoided:

1. signing a contract with a company operated by a licensed builder but not itself having the relevant contractor licence [at the present there are over 900 different types of licence and the licensing system is itself being overhauled];

2. signing a contract with a builder who although holding one or more licences issued by the Dept. of Commerce, is not licensed to contract for the particular type of work included in the contract. So-called specialist sub-contract work such as plumbing and electrical work must only be done by duly qualified tradespersons.

The first mistake is that the law treats a company as a distinct entity separate from the individuals who form and/or manage the company. Thus under this amazing rule, if the company does not hold a contractor licence, the home owner in fact is contracting with an unlicensed contractor - notwithstanding that the company has a director or an employee with a contractor licence [since the director or employee is not a contracting party to the contract]. The home may not then be covered by Home Owners Warranty insurance. If you have to sell the home within six years, the lack of a HOW policy may result in a depressed price on re-sale. As with all aspects of construction law there are exceptions to many of these general rules and you need to confer with an experienced solicitor in the event of conflict or dispute.

Home owners should be mindful that without the scrutiny of the licensing process, a company could simply be a shell company with minimal value of assets. This means that if anything goes wrong, there might be nothing that an angry home owner might have recourse to for compensation.

The main issue with the second type of mistake is that the builder who is about to carry out the type of work included in the contract might not indeed possess the technical qualification and/or financial capacity to do so. The home owners are just putting themselves in substantial risk of ending with unsatisfactory work and/or disputes.

A licence check with the Home Building Service should immediately provide home owners the necessary verification of the licensing details and current status of the proposed builder who is about to sign the contract.


Other misconceptions; provisional & PC sums; the type of insurance and exceptions to the cooling off period

The 5-day cooling off period provided for in the Home Building Act 1989 means that a home owner is now entitled to rescind the building contract, even if building work has commenced, by giving a notice in writing to the contractor:

- within 5 clear business days after the home owner is given a copy of the signed contract; or
- if the home owner is not given a copy of the signed contract within 5 clear business days after the signing of the contract, at any time before the expiration of 5 clear business days after the home owners becomes aware that he or she is entitled to be given a copy of the signed contract.

However, the cooling off period may be shortened or deleted from the contract but only when the home owner gives to the contractor a certificate by a legal practitioner containing a statement to the effect that the legal practitioner has explained the effect of the certificate to the home owner.


By law, building work with a value more than $12,000.00 requires the contractor to provide home warranty insurance to the owner. A certificate of insurance must be provided by the contractor before the contractor can receive any money, including a deposit payment, under the contract or before doing any work with a value more than $12,000.00.

Home owners should not confuse home warranty insurance with the following insurances which are also generally required to be effected by contractors:

- builder's all-risk insurance;
- public liability insurance; and
- workers compensation insurance.


Often, a contract price thought to be a fixed lump sum may not be "fixed" in the sense that there will be no change at all in the price at the end of the day. Contract price often needs to be adjusted because most home building contracts allow owners to make insubstantial changes to the scope of work by deletions, alterations and/or additions. Sometimes there are changes due to unforeseen matters or new council requirements that cannot be anticipated by the builder at the time when the contract was signed.

Where provisional sums and/or prime costs items are included in the contract price, these sums or items are based on estimates only and will need to be adjusted by the actual costs incurred when the items of work are carried out. Most building contracts contain provisions as to how such sums or items are to be calculated.

By law, all variations must be notified in writing by the builder to the home owner before commencement of the variation works.
 

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