Can a home buyer claim compensation for a water leak after settlement?

If a home buyer notices water stains appearing on the ceiling when it rains, soon after they settle and move in, do they have any rights to claim compensation from the vendor?

According to the recent decision of the Supreme Court of New South Wales in Stevenson v Ashton [2019] NSWSC 1689 (Harrison AsJ), the vendor might be liable to pay compensation, if the water leak was caused by defective building work done within the previous six years, even after settlement has taken place.

The Law – Defective Building Work

The statutory defects warranty

Under the Home Building Act 1989 (NSW) (the ‘Act’), the builder warrants to the owner that the work is done with due care and skill (s 18B(1)(a)) and that the work will comply with the law (such as the Building Code of Australia) (s 18B(1)(c)).

Building defects are breaches of the warranty.

There are two kinds of building defects: a major defect where the warranty period is 6 years, and other defects where the warranty period is 2 years (s 18E(1)(b)) from the date of completion of the work (s 18E(1)(c)).

What is a major defect?

The definition of major defect was limited to a structural defect until 2015, when it was redefined to be a defect in a major element of a building, namely:

1. an internal or external load-bearing component of a building that is essential to the stability of the building, or any part of it (including but not limited to foundations and footings, floors, walls, roofs, columns and beams), or
2. a fire safety system, or
3. waterproofing, or
4. External cladding which causes or is likely to cause a threat to the safety of any occupants of the building if a fire occurs in the building (s 18E(4))

Of these elements, waterproofing is a common defect. Schedule 4 of the Home Building Regulation 2014 (NSW) makes it clear that it applies to both water entry and water seepage:

waterproofing is protective treatment designed to prevent the penetration of water or moisture into the dwelling or to wet areas in a dwelling designed to prevent the unwanted escape of water from those areas by using solid membranes or membranes applied by brush, roller or any other method. (emphasis added)

Why is the former owner liable?

The 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 is entitled to the benefit of the statutory warranties as if they had contracted with the buyer to do the work. (s 18C & 18D)

The case of Stevenson v Ashton

Facts

One month after settlement and moving into a renovated late 19th century terrace house in Darlinghurst, Stevenson noticed water staining at two points in the ceiling in the ground floor living room during heavy rain.

The expert identified the cause as being the defective construction of the external balcony (which was tiled) on the first floor:

“the build-up of water enters the bedroom floor because there is no step at the door sills, the membrane is possibly leaking at the junction of the parapet walls because there is no upturn or flashing and there is no provision of an overflow spitter pipe through the parapet wall”.

The expert’s opinion was that in each respect, the construction of the balcony did not comply with the Australian standard AS4654.2-2009.

The expert concluded that:

“If water penetration is allowed to continue without rectification of the balcony it will eventually be destructive of the plasterboard sheets in the ceiling below and it will eventually cause the joists and timber, structural joists and ceilings in the ceiling below to get wet which will set up conditions for rot and fungal decay.”

Similar observations and conclusions applied to the cladding on the exterior of the attic and the bedroom at the rear which was not installed according to the manufacturer’s instructions.

The building work was done subject to Development Consent from the Council for extensive extensions to the rear living room and kitchen, to the first floor and to the attic. The work was complete in May 2014, which was 2 years before the purchaser completed the purchase in May 2016. The work was managed by Ashton who held an owner-builder permit.

The findings and rulings on the law

Stevenson instituted proceedings against Ashton in the Civil and Administrative Tribunal of New South Wales (NCAT) in November 2016, which was more than 2 years after the work was complete. As a result, unless there was a major defect, the right to claim compensation was no longer available.

The Tribunal found that work to the balcony and the cladding was defective. It was satisfied that:

1. The defect was a major defect, that is, waterproofing; and
2. The defect was attributable to defective design or defective or faulty workmanship; and
3. The defective waterproofing has caused water penetration into building cavities which was likely to cause the threat of collapse of the building or part of the building. (s 18E(4)(a))

The Tribunal awarded $10,987.68 for the cost of rectification of the balcony and $31,330.09 for the cost of rectification of the cladding.

The Tribunal rejected claims for the roofing and guttering. The defects were: the roof sheets had unsealed lap joints, the gutters overflowed back towards the building, and the roof flashing joints overlap was insufficient.

The Tribunal held that these defects did not satisfy the major defect requirement that: “the likely consequence of a failure to repair the roofing defects will be that any part of the building will become uninhabitable, be destroyed, or collapse” because there was no evidence of water penetration. Because they were not a major defect, the 2 year limitation period to make claims had expired. See Stevenson v Ashton [2018] NSWCATCD 25

The Appeal Panel of the Tribunal took a more narrow view than the Tribunal stating that the “consequences of the defect must be shown to have, or to probably have, a proven consequence for the habitation, or use, of the building, or to the integrity of the building”.

It found that that the expert’s evidence on future damage from water penetration amounted to no more than speculation or assumption. It noted that the cladding had been in place 4 years without water damage. It ruled that there was insufficient evidence to find that defects will cause or be likely to cause the building to become uninhabitable, be destroyed or collapse as required by s 18E(4).

For this reason, the Appeal Panel reversed the Tribunal’s decision, found that the balcony and cladding defects were not a major defect and denied the claim for compensation. See Ashton v Stevenson; Stevenson v Ashton [2019] NSWCATAP 67

On appeal, the Supreme Court found that the Appeal Tribunal “placed too great an emphasis on the present manifestation of the consequences under s 18E(4)(a)(i) to (iii), despite the legislation also permitting defects which are “likely to cause” those consequences to be major defects”.

Accordingly, the Court found that the Appeal Panel was in error to find that the defects were not major defects. For the balcony, it was wrong to require “that the relevant consequences are presently manifested”, because the s 18E(4)(a) definition includes “likely to cause”. For the cladding, it was open to the Tribunal to accept expert evidence: “that the defects would inevitably in time lead to moisture penetration in the building”.

The Court ordered that the matter be remitted to NCAT for determination according to law.

Conclusions

Does caveat emptor apply?

In conveyancing law and practice, the maxim caveat emptor means that a purchaser has no right to complain about building defects once they enter into an unconditional Contract for Sale of the land. Commonly, the Contract contains a clause to this effect.

A purchaser must therefore do due diligence by obtaining Building and Pest Inspection Reports before they enter into a Contract or before the Cooling Off period expires.

Under the statutory defects warranty, a purchaser of a new house or strata villa or home unit (less than 4 storeys) can claim the cost of repairing building defects from the vendor who had the new home, villa or unit built (s 18D(1)), provided they make the claim within 6 years for a major defect and 2 years for other defects.

The statutory defects warranty represents a major exception to the maxim caveat emptor because it cannot be excluded (s 18G). It is therefore available to a purchaser after settlement of the purchase.

This statutory defects warranty may not be available if the purchaser purchased “in full knowledge of the defects” at a price which reflected the existence of the defects, according to Allianz v Waterbrook [2009] NSWCA 224 (per Ipp JA at 110- 116).

In Stevenson v Ashton the Tribunal had no evidence to infer that Stevenson had ““full knowledge” of both the nature of the defects and the work required to rectify them”.

What is a major defect?

The case of Stevenson v Ashton is the first time the NSW Supreme Court has had to consider the definition of the term major defect, which replaced the former term structural defect on 15 January 2015.

The express inclusion of waterproofing as a major defect is a major advance for all home owners because it allows 6 years for a claim to be made from the date the work was complete.
The Supreme Court’s ruling that it is only necessary to prove it will likely cause, not actually has caused the building to become uninhabitable, be destroyed or collapse, has widened the scope of possible claims.

The case of Stevenson v Ashton has made claims for defective balcony construction or external cladding which cause water ingress feasible. Claims for defective roofing, guttering and roof flashings are not feasible without strong evidence that the water ingress has penetrated into building cavities and is likely to be destructive to the building.

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