Articles

Owner builder insurance

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.

Off the plan duty concessions

Duty concessions available for off the plan sales need to be understood by both vendors and purchasers.

Vendors selling off the plan properties often emphasis the potential for “huge stamp duty savings” and, indeed, duty is calculated on such transfers at a concessional rate, making them appealing to potential purchasers.  But unless the parties understand the extent of the concession the purchaser may be disappointed and the vendor potentially liable for misrepresentation.

The duty concession is available wherever the contract anticipates building work being performed during the course of the contract on the basis that duty is calculated on the value of the property as at the contract date and is not payable on the value of any building works constructed between contract and settlement. The concession is available whether the property is a stand alone home, a unit in a small development or a lot on a multi-storey plan of subdivision.  It is also available, on a proportional basis, provided that any construction is to be undertaken, with the full concession available if total construction takes place during the contract, diminishing to no concession if construction was complete as at the contract date.

Calculating duty is an important task for the solicitor for the purchaser but can only be undertaken on the basis of information provided by the vendor in the form of an Off the Plan Statutory Declaration that provides the basis for calculating dutiable value.  The vendor’s obligation to provide this document arises from GC.10.1(a)(ii) of the standard contract that requires the vendor to do all things necessary to enable the purchaser to become registered.  The purchaser is unable to register the Transfer until duty is assessed and duty cannot be assessed in relation to these transactions without the Declaration.

The vendor may choose to use the Fixed Percentage Method or Alternative Method to calculate the cost of construction.  Unless the contract requires the vendor to adopt the Alternative Method, the vendor will generally adopt the simpler Fixed Percentage Method.  The percentage of the contract price allocated to construction is:

single dwelling    45%       multi-dwelling    60%       high rise    75%

If construction has not commenced as at the contract date then the concession will be calculated by reducing the contract price by the amount equal to the full construction cost calculated by reference to the Fixed Percentage and then calculating duty on the reduced consideration.

If the contract price is $600,000 and the contract is signed prior to commencement of construction then duty is calculated as follows:

Single dwelling $600,000 x 45% = $270,000 construction cost
minus $270,000 (100% construction cost)
dutiable value = $330,000
multi-lot (up to 3 storey)  $600,000 x 60% = $360,000 construction cost
minus  $360,000 (100% construction cost)
dutiable value =  $240,000
high rise (4 storey & above)  $600,000 x 75% = $450,000 construction cost
minus  $450,000 (100% construction cost)
dutiable value =  $150,000

If construction is 25% complete when the contract is signed then the cost of post contract construction will be reduced to 75% of the construction cost.  The deduction from the contract price will therefore be less, resulting in a higher dutiable value and higher duty as the percentage of post contract construction deceases.