I recently presented to an audience of property investors on why domestic building contracts are unfair and owners should get advice BEFORE they sign one. The presentation certainly opened some eyes and was well received. I have set out below 5 simple illustrations from this presentation to make the point that building contracts are one sided.
Evidence of Funds
It is a standard requirement that you, as owner, have to prove to the builder that you have sufficient funds to pay for the build before the builder commences work. This may take the form of funds in a bank account, a line of credit or evidence that a construction loan has been approved. In some cases, the builder can make a further request during the build.
If you can’t or won’t provide evidence of funds to complete then the builder isn’t obliged to start work or may be entitled to suspend work.
On the other hand, what happens if you as owner requires evidence that the builder has the funds to complete the build or service their obligations? My guess is radio silence. The standard contract doesn’t make any provision for the builder to provide evidence of solvency.
This is odd as we have seen over the past year or two a wave of large and small residential builders enter into liquidation. It seems to me that asking your builder to prove that they aren’t next is a fair question!
Personal Guarantees
If the property being renovated or built upon is owned by a company then the directors of that company will be expected to provide personal guarantees. That means, if the company under the building contract defaults then the directors of that company will be personally liable to make good any defaults to the builder.
This is in addition to the company having to provide proof of funds at the outset and, in some states, the builder having a charge over the property and the right to lodge a caveat to secure any amounts due to the builder.
On the other hand – almost all builders trade through a company. If you were to ask for the directors of the building company to provide personal guarantees you would get a blank look (if not worse). Potential responses include we can’t do that, no-one ever asks for that or why would you want that?
The point is that, even assuming you have builders warranty insurance in place, insurance won’t necessarily cover all of your losses if the builder becomes insolvent.
Commencement Date
It’s a subtle point – but whilst the builder is supposed to start work within a specified number of days of the preconditions being satisfied the Commencement Date is usually the day the builder actually starts work. That is, the builder might be obliged to start work 21 days after you provide evidence of funds, ownership and relevant permits but if the builder starts 14 days after that there is no penalty imposed on the builder.
On the other hand, if you, as owner, cause delays you may be hit with delay damages or the builder may be entitled to suspend work under the contract with nasty consequences.
Variations
If you, as owner, request a variation a number of provisions typically apply:
- The builder is not obliged to agree to any variation;
- Builders increasingly charge a fee just to price the variation; and
- The builder won’t agree to the variation unless you sign off and typically pay any extra cost with the next progress claim.
On the other hand, what happens when the builder decides that a variation is necessary? The builder is supposed to provide a notice confirming the cost within a reasonable time. However, if as is common, the builder simply gives you a bundle of variations at the end of the job – there is nothing you can do about it.
Liquidated Damages
Liquidated damages that the builder is obliged to pay the owner where completion is delayed. Bear in mind that the builder is entitled to ask for variations and extensions of time where circumstances arise that are outside the builder’s control. Hence we are really talking about delays that are within the builder’s reasonable control.
The standard contracts typically provide that liquidated damages of $250 per week will apply. In fact I have heard it said that in some states there is an informal agreement between builders that they won’t accept any figure higher than this.
However, if we look at a simple example of a block of land worth $700,000 and a building contract for $600,000 then late in the build the owner will have close to $1,300,000 tied up in the project. Assuming an interest rate of 6% this will be costing the owner around $1,500 per week in interest alone without including property outgoings. As an alternative, if the home owner is renting elsewhere then delays may cost a weeks rent – which will be much more than $250 per week.
Sadly, it doesn’t stop there. Liquidated damages can only be deducted from the final progress claim. This is true even if the builder is months over the completion date when other progress claims are made. Finally, if you decide that your builder will never finish the build and terminate the contract then most contracts provide that you lose any right to liquidated damages!
Advice
For these reasons and more – when presented with a domestic building contract I believe you need independent legal advice. If you aren’t convinced – you can click here to read about some of the more outrageous special conditions that builders insert into contracts!
Builders are very good at pressuring owners to sign contracts quickly and presenting the standard HIA / MBA domestic building contracts as somehow being unable to be amended.
The truth is that these contracts are prepared by the Builder’s Associations to serve the interests of the builders. If something goes wrong, many owners will find themselves between a rock and a hard place.
Lewis O’Brien & Associates offers fixed price building contract reviews for the standard domestic building contracts. There include:
- A formal written review of your building contract;
- Our recommended special conditions to restore a sense of fairness; and
- A 30 minute zoom consultation with me to answer any questions you have about our review, the special conditions of the contract generally.
If you aren’t thinking of investing in, selling or developing property, but know someone that is please share this article with them.
Lewis O’Brien
Your Preferred Property Lawyer