Beneficiaries of policies issued under the Home Building Compensation Fund
By Thomas Waugh and Daniel Russell
The case of Gardez Nominees Pty Ltd v NSW Self Insurance Corporation  NSWSC 1916 provides recent judicial commentary relating to the terms ‘successor in title’, ‘co – owner’ and ‘developer’ in the Home Building Act 1989 (NSW) (‘HBA’).
On 28 April 2016, the Supreme Court of New South Wales handed down answers to 5 preliminary questions in proceedings commenced by Gardez Nominees (‘Plaintiff’), against NSW Self Insurance Corporation (‘Defendant’) following the Defendant’s denial of liability to the Plaintiff under a Home Warranty Insurance Policy (‘Policy’) issued to Railway Land Holdings Pty Ltd, the developer of a residential strata development (‘Railway’).
Railway, the registered owner/developer of property at Bellambi, NSW, entered into a building contract with a builder to develop residential strata dwellings in late 2012 (‘Contract’).The development was financed by the Plaintiff, who took a registered mortgage over the property as security. The builder undertook to the Plaintiff to perform its obligations under the Contract in a ‘Side Deed’.
The Policy covered, inter alia, loss or damage arising from non – completion of the work due to insolvency of the builder or breach by the builder of the statutory warranties under the HBA (‘warranties’) in circumstances where the builder is insolvent. The builder became insolvent and did not complete the work. This constituted both a breach of the warranties and an event of default under the loan agreement between the Plaintiff and Railway. The Plaintiff took possession of the property as mortgagee in mid-2014 and lodged a claim with the Defendant under the Policy. The claim was denied in early 2015.
Findings of the Court
Section 18D(1) of the HBA extends the benefit of the warranties to ‘successors in title’. Section 99 requires that a contract for insurance in relation to residential building work must insure ‘a person on whose behalf work was done’ and their ‘successors in title’.
The Plaintiff argued that it was Railway’s ‘successor in title’ and was entitled to the benefit of the warranties and insurance coverage on the following grounds: 1) The exercise of the right to possession by the Plaintiff as mortgagee entitled it to various rights and obligations that were important aspects of ownership and 2) Section 3(1) of the HBA extended the meaning of the term ‘owner’ to mortgagees in possession.
In support of ground 1), the Plaintiff relied upon the decision of United Starr Bowkett Co-operative Building Society (No 11) Ltd v Clyne  1 NSWR 134 in which the NSW Court of Appeal held that a mortgagee of land bound by a pre - existing lease became a ‘successor in title’ to the mortgagor/prior lessor under section 8(1) of the Landlord and Tenant (Amendment) Act (‘LT Act’).Unable to accept the Plaintiff’s contention, the Court held that the meaning of ‘successor in title’ in United Starr Bowkett was contingent upon the particular construction of the LT Act rather than of universal application. In the present circumstances, Railway was, and had remained, the registered owner of the property both before and after the Plaintiff had taken possession. The Plaintiff had a right to possession under section 60 of the Real Property Act but had not acquired title to the property. Accordingly, the Court held it was not a ‘successor in title’.
As to ground 2), the Court held that the extension of the term ‘owner’ to include mortgagees in possession (and other entitled to the rents and profits of land) did not mean that mortgagees became statutory owners in their own right (i.e. ‘successors in title’) when taking possession.
The Plaintiff contended that it was a ‘non contracting owner’ under section 3(1) of the HBA and that, as such, it was entitled to the benefit of the warranties by operation of section 18D(1A) of the HBA and to coverage under the Policy by operation of section 99(2A) of the HBA.
The Court referred to the second reading speech of the Home Building Amendment (Warranties and Insurance) Act 2010, which made provision for ‘non – contracting owners’ (and their successors in title). In so doing it held that the term applied to an owner of land at the time that anotherperson had contracted with a builder to undertake residential building. Accordingly, the Plaintiff was not a ‘non contracting owner’ for the purposes of the HBA and was not entitled to insurance coverage under the above provisions.
Assuming that the Plaintiff was a ‘non contracting owner’, the Court was asked to determine whether it was entitled to the benefit of insurance coverage extended to such owners under section 99(2A) of the HBA in circumstances where Railway, being a developer, was expressly not entitled to insurance coverage by operation of section 99(2)(a).
Section 99(2A) extends a provision of an insurance contract providing cover to ‘a person on whose behalf [residential building] work is done’ to the non-contracting owner. The Court held that the benefit afforded to Railway, as a developer, was not insurance coverage per se but the right to pass on the benefit of warranties and insurance coverage to its successors in title. Assuming that the Plaintiff had been a ‘non contracting owner’, the right to pass on insurance coverage would have been the only benefit to which it would have been entitled.
The Defendant contended that, upon taking possession of the Property in mid-2014, the Plaintiff was a ‘person on whose behalf work was done’ pursuant to the Side Deed or Contract and accordingly, a developer for the purposes of the HBA by virtue of subsection 3A(1) of the HBA and therefore not entitled to insurance coverage.
The Court rejected this contention and agreed with the Plaintiff, noting that whilst clause 2.3 of the Side Deed contained an undertaking by the builder to comply with its obligations under the Contract, the Plaintiff was not thereby a party to the Contract itself.
Moreover, subsection 3A(2) requires that in order to be considered a ‘developer’ for the purposes of the HBA, the person on whose behalf work is done is or will be the owner of 4 or more existing or propose dwellings in a residential development. For the reasons set out below, the Court did not consider the Plaintiff to be the owner for this purpose.
The Defendant contended that the Plaintiff was an ‘owner’ under section 3(1) of the HBA. Subsection 3A(1A) deems residential building work to have been done ‘on behalf of an owner’ even if actually done on behalf of another person. It argued that the Plaintiff was therefore a developer under subsection 3A(1) and not entitled to insurance coverage.
The Plaintiff argued that subsection 3A(1A) did not apply as it was not ‘an owner’ at the time the residential building work had been undertaken.
The Court held that the subsection’s natural meaning required the Plaintiff to have been the owner at the time the residential building work was undertaken. Accordingly, it was not a developer by virtue of this provision and therefore could not be denied coverage on this basis.
The Court’s decision reminds us that the warranties contained in Part 2C of the HBA have as their primary focus the protection of the consumer, and reinforces the notion that, following the decision of Ace Woollhara Pty Ltd v Owners – Strata Plan 61424 (2010) 77 NSWLR 613, the term ‘non – contacting owner’ was inserted into the HBA so as to extend the benefit of warranties to those who would, otherwise, be unable to claim under the warranties because they had not been a party to the building contract, together with their successors in title.
Although the Court held that a mortgagee in the Plaintiff’s position was not entitled to the benefit of the warranties and insurance coverage, it did however note that the mortgagee would obtain ‘an indirect benefit’ as it could sell the Property to a person, who would acquire the direct benefit of the warranties and insurance coverage owing to the rights afforded to successors in title of Railway.