Often we receive enquiries from clients seeking an explanation of items contained in Schedule 1 of the Housing Industry Association (HIA)’s residential building contracts. Here is a list of common queries and explanations.
Encumbrances, Covenants and Easements
An encumbrance is a right to, interest in, or legal liability on real property, such as a mortgage. A covenant is a condition tied to the use of land, and an easement is a section of land registered on the property title which gives someone the right to use the land for a specific purpose (even though they are not the land owner), such as a right of way, utility easement, or a shared driveway.
This information needs to be obtained from the client or via the Certificate of Title. It is important in that it can affect what is built on the land, and where the dwelling is placed on the land. It could also highlight to you who may have competing interests over the land.
Liquidated Damages and Reasonable Amount
When you are negotiating a contract, you should be very clear as to whether liquidated damages are applicable, or if the contract excludes the parties’ rights to liquidated damages.
Liquidated damages are defined as the compensation payable by the builder to the owner for not reaching practical completion by the end of the building period.
A fairly negotiated contract would generally involve the inclusion of an amount for liquidated damages that reflects the actual amount of the owner’s loss if you are late in reaching practical completion. For example, any additional rental expenses that the owner may incur if they are unable to move into their home on time.
Interest on Late Payments
Where a progress payment is not paid by the due date, the contract provides that the builder may charge interest on that late payment. The schedule provides a space to nominate a percentage, and it is up to the parties to negotiate this amount.
Where this is left blank, there is a default interest rate. This will be the post judgement interest rate applicable to judgements in the NSW Supreme Court at that point in time (when claiming the interest). Currently it is 7.5 per cent per annum, but this rate is subject to change every six months.
Deed of Guarantee and Indemnity
Where the owner is not a natural person (e.g. a company or trust) or is a young person who is being financed by their parents or relatives, it is good practice to have a guarantor.
A guarantor is a natural person who takes responsibility for the owner’s obligations under the contract and acts as a guarantee. Note that it is common practice for directors or shareholders to guarantee a company’s obligations. A guarantee creates a legal right to enforce a contract against the guarantor(s) in the event that your client defaults under the contract. This is usually the recovery of money that your client fails to pay.
If you require the owner to have a guarantor, insert the guarantor’s name in Schedule 1 and have that person sign the Deed of Guarantee and Indemnity at the back of the contract. Legal advice should always be sought prior to taking this step.
Final Occupancy Certificate
The HIA contract provides that the builder is not required to obtain the final occupancy certificate (OC). In many cases the builder, while undertaking a majority of the project, will not be responsible for all things necessary to obtain the OC. For example, the client may wish to do their own painting or landscaping. In these instances, the builder would not include the OC as part of their scope of works as they would not be able to reach practical completion and claim final payment until all of this work is complete.
In the event that the builder will be responsible for all the works and has agreed to obtain the OC, then this clause can be amended. If this is the case and OC falls under the builder’s scope of works, practical completion and final payment cannot be claimed until it has been obtained.
If you have any questions in relation to the above, please feel free to contact our team of lawyers at The Quinn Group on (02) 9223 9166 or submit an online enquiry form today.