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Property: Owning warranty insurance obligations


Every Issue

Cite as: (2009) 83(03) LIJ, p.81


There is great potential for vendors’ solicitors to get warranty insurance wrong when it involves owner-builders.

No topic (apart perhaps from GST) causes conveyancing lawyers as much angst as owner-builders.

The requirement that a vendor who sells a home within “the prescribed period” provide warranty insurance to the purchaser sounds simple enough, but the reality is that solicitors for the vendor regularly fail to get it right.

The relevant legislation (s137 of the Building Act) is written in such a way that it defies initial comprehension and additionally appears to have the uncanny ability to deny retention even when understanding is finally achieved.

Recently introduced (but not yet operative) amendments to the Building Act give cause to review these requirements.

Owner-builder

An owner-builder for the purposes of the section is any person who undertakes construction (which includes extension or renovation) of a home who is not a registered builder.

Where a person applies to a local council for a building permit to undertake construction work in relation to a home and nominates the applicant as the owner and the builder, then that person will be an owner-builder for these purposes.

If the permit nominates a registered builder as the builder, then the owner will not be an owner-builder (unless the registered builder is also the registered owner of the land, in which case some requirements of the section apply).

Thus, the building permit is the key to understanding these requirements and in many cases will determine whether insurance is required.

Prescribed period

The obligation to provide insurance relates to a sale within the prescribed period, which is a period that refers to the date of the contract of sale.

The “start” date for the prescribed period is the contract date and insurance is required if construction took place within a period of time preceding the contract – it is a matter of counting backwards.

Because construction of a home will necessarily take months (or even years) the relevant date is “the completion date” so, in its simplest form, the section requires a vendor to provide insurance if selling within six years and six months of completing construction.

In an ideal world, determining a completion date would simply require reference to a completion certificate (certificate of occupancy for a new home or certificate of final inspection for renovations) and if that date is within six years and six months of sale, insurance is required.

However, in reality many owner-builders do not obtain a completion certificate, or at least not contemporaneously with actual completion, and so the section provides an alternative period of seven years from “the date of commencement”.

This will help in the situation where the owner, despite not obtaining a completion certificate, did obtain a building permit and is thereby able to objectively establish a commencement date. But not all owner-builders get a building permit, as much owner-builder construction is minor in nature and does not require a permit (or at least that is what the owner-builder believes).

Establishing a completion date or commencement date in such circumstances is problematic as the only evidence available is subjective information from the owner-builder vendor.

The amendments (to come into effect by 30 September 2009) define the prescribed period by reference to a completion certificate or building permit (as above) but also, in the absence of either, by reference to a “certified date of commencement”1 to be provided by statutory declaration by the owner.

This would appear to be an attempt to invest the subjective information provided by the owner with some objective virtue by requiring it to be given in the form of a statutory declaration.

These amendments clearly envisage the application of the insurance obligations in situations where no building permit was obtained, laying to rest the suggestion that the Building Act does not apply to “non-permit” work.

While insurance will not be required unless the value of the work exceeds $12,000,2 the other obligations – to have a condition report and warranties – are not subject to this qualification and must be provided in all cases where an owner-builder sells within the prescribed period.

The amendments also make it clear that the obligations apply to a mortgagee in possession and an executor or administrator of the estate of the owner.3

Section 137B will continue to plague conveyancing lawyers.

Even a good understanding of the requirements only provides answers in 90 per cent of cases as the Building Act is drafted with an expectation that owners (and builders) will always do the right thing.


RUSSELL COCKS is the author of 101 Conveyancing Answers.

1. New s137B(7)(a)(ii)(B) of the Building Act.

2. Definition of “required insurance” in ministerial order.

3. New s137B(5AA).

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