Unit Owners succeed with common property defects claim - Shearman v Dosen Holdings [2024] ACTMC 4

In a recent decision of the ACT Magistrates Court - Shearman v Dosen Holdings [2024] ACTMC 4 - the plaintiffs, being 7 of 8 owners in units and associated common property in Turner, ACT, successfully sued the builder and seller, namely Dosen Holdings Pty Ltd (Dosen) for damages.

Dosen, who did not participate in the hearing, had warranted, by contracts of sale, that it was unaware of unfunded defects in common property. Each of the contracts for sale that Dosen entered into with the plaintiffs adopted a standard form contract, entitled “The Law Society of the Australian Capital Territory: Contract for Sale”. The contract contained the following warranties in clause 33.1:

(a) “to the Seller’s knowledge, there are no unfunded latent or patent defects in the Common Property or Owners Corporation assets” other than “defects arising through fair wear and tear” and “defects disclosed in this Contract”; and

(b) “to the Seller’s knowledge, there are no actual, contingent or expected unfunded liabilities of the Owners Corporation that are not part of the Owners Corporation’s normal operating expenses, other than liabilities disclosed in this Contract”.

Contrary to these warranties, there were in fact unfunded defects in the common property at the time of sale.

The plaintiffs sought damages for:

a.???? breach of contract; and

b.???? misleading and deceptive conduct in breach of the Australian Consumer Law (ACL).

Certain plaintiffs also sought relief particular to their individual circumstances.

Issues

The Court usefully summarised the key factual issues as:

(a) ?????? whether there were defects in the common property of the premises at the time the plaintiffs purchased their units;

(b) ?????? whether any defects in the common property were unfunded; and

(c) ?????? to the extent that there were unfunded defects in the common property, whether Dosen was aware that that was the case when it entered into the contracts for sale with each of the plaintiffs.

The Defects

The Court had evidence before it as to when each plaintiff purchased their unit. Also, the evidence, including expert evidence, established that the various defects including (and the following is by no means exhaustive): waterproofing and tiling issues on the balconies and podium areas, leaking roofs and carparks, and defects in the fa?ade, such as cracking and glazing defects.

Absence of special purpose fund

Whilst Dosen contributed an amount of money to a sicking fund, the Court was not satisfied those funds could be used to pay for rectification works in common areas due to restrictions in Unit Titles Management Act 2011 (ACT) (UTMA), and on the pleadings. That said, the Court went to great lengths to explain that even if that conclusion was incorrect, on the facts before it as to how much money was in the sinking fund and when, as well as the likely cost of rectification, the defects in the common property were still unfunded (or largely unfunded).

Dosen’s awareness of the defects

Dosen, in addition to selling the units in question, built the units and leased them for a period of time. For a significant period of 6 or 7 years, it was responsible for maintaining the units and the expert evidence disclosed that there had been prior attempts at remediating some of the defects without any intervening events. As such, the Court comfortably inferred that Dosen was responsible for the attempted remediation work and had knowledge of the defect issues. In fact, the evidence of a couple of the plaintiffs suggested that Dosen had an expectation that there would be ongoing issues. The Court gave Dosen the benefit of the doubt, holding that Dosen may have considered that the issues were rectified, however it was satisfied it was more likely than not Dosen ought to have had knowledge of the defects at the time of sale. This was all the more so given all the defects arose from the way the premises were constructed.

Suffice to say, the liability claims in breach of contract and pursuant to the ACL both succeeded.

Loss

The plaintiffs claimed that, as a result of Dosen’s breach of the sales contacts, they had suffered loss and damage, being the obligation to make contributions by way of special levy towards the costs of repair of the defects in the common property.

However, following Rialto Sports Pty Limited v Cancer Care Associates Pty Limited; CCA Estates Pty Limited; Davjul Holdings Pty Limited; Armmam Pty Limited [2022] NSWCA 146 (Rialto), the Court was of the view that the loss suffered by the plaintiffs is the diminution in the value of each of their respective interests in the common property, not the exposure of the plaintiffs to any future obligation to pay a special levy. The Court gave the example of:

a unit owner who sold (or was seeking to sell) their unit before any resolution was passed for a special levy. That unit owner would still have suffered a loss, because the value of their unit would be less than it would have been if the warranty had proved to be correct (because there are defects in the common property which need to be rectified and the owners corporation does not have sufficient funds to pay for the rectification work).

The evidence before the Court was that the reasonable cost of rectifying the defects was $155,162.40. Though the plaintiffs claimed 7/8th of this on the basis they were 7 of the 8 owners, the Court apportioned the damages to reflect their unit entitlements. The respective unit entitlements were not equal and more accurately reflected the plaintiffs’ interest in the common property. That said, there were some additional nuances that impacted the final apportionment of loss and therefore the damages payable.? Ultimately, the total loss suffered by the plaintiffs to rectify the defects was determined to be $139,919.10.

Takeaway

Unfortunately, defects to units and common property of the type mentioned in this note are not uncommon in the ACT. Owners should be alive to standing issues which may impact on the apportionment of loss and the quantum of any damages payable, especially where the proceedings are in respect of defects to common property and they are not brought by the Owners Corporation.