Commercial Property Blog

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Construction contracts: What commercial investors need to know

Posted by Dean Claughton on 21 Aug 2015

I wrote a few weeks ago about the diligence needed by prospective purchasers of commercial property. However a unanimous decision by the High Court indicates that commercial investors will have to be just as careful, particularly when drafting their contract to protect their own interests.

The case of Brookfield Multiplex Ltd v Owners Strata Plan 61288 [2014] HCA 36 concerned the construction of an apartment complex under a design and construct contract. The apartments were to be operated collectively as serviced apartments and the lots had been sold to investors.

An ‘Owners Corporation’ was formed following the registration of the strata plan and acted as the manager of the scheme, as well as the agent for the owners of the serviced apartments.

Structural defects in the common property that was registered to the Corporation, were discovered and this is where everything became messy.

The design and construct contract was detailed in its scope for the quality of work owed and what would be needed to fix any defects found. Each owner was also owed contractual rights under the contract for sale in relation to both their own lots and the common property.

Despite this, the High Court still determined that that the builder had no duty of care to the Owners Corporation for the cost of repairing the defects in the common property.

The Court determined that a Duty of Care should be confined to cases where the property is residential, and the subsequent owner is evidenced to be vulnerable to a builder’s lack of reasonable care. The Court was of the opinion that Corporation should have protected their own interests through contract, and held that it wasn’t vulnerable to a builder’s lack of reasonable care.

This case illustrates the need for investors to analyse the terms of their contract carefully to make sure they’re shielded from defects that may occur. If you need advise with commercial contracts, please contact the Coleman Greig Commercial Property team: