Residential Focus

Who pays when the dream costs too much to build?

Tales of low-balling advice on likely construction costs are common place. We take a look at a decision on an extreme example where the owners overcapitalised in the context of a cost-plus contract.

Background

The appellants were the owners (Owners) of a property located in Kings Creek NSW (Property) and engaged the respondent (Architect) to design a renovation.

The Owners’ objectives included an extension to the existing house, as well as the construction of a pool, a tennis court and a sauna (Renovations). The Owners indicated that they had an initial budget of $300,000.

In April 2015, the Architect provided the Owners with “opinion on probable cost” for a preliminary design that estimated the cost of the Renovations at $590,000, excluding GST and other items.

The Owners then revised their budget to a figure of $600,000. The Owners and the Architect then refined the designs for the Renovations and a quote was sought from a builder.

In October 2015, a builder provided a quote for the Renovations of between $550,000 and $600,000, excluding the pool, sauna, tennis court, a driveway, and other works.

A different builder was engaged by the Owners, under a cost-plus contract in or about December 2015.

The relationship between the Owners and the Architect deteriorated in or about February 2016, and the work proceeded without the assistance of the Architect.

In June 2016, the builder advised that the cost of achieving the Owners’ objectives would exceed $1,000,000. This resulted in a descope.

The descoped Renovations cost approximately $781,000, but only increased the market value of the property by $330,000.

The Owners sued the Architect:

for breach of section 18 of the Australian Consumer Law (ACL), alleging that in April 2015, he made an express representation that the Owners could achieve their Renovation objectives for the amount of $600,000, by making some costs savings
in contract and tort alleging, among other things, that he breached a concurrent contractual and tortious duty to advise them about the likelihood of achieving their stated budget and time requirements for the architectural service concerned.

The decision

The trial judge found:

the Architect was not informed by the Owners that their maximum budget was $600,000
the Architect did not represent to the Owners that the Renovation objectives could be achieved with a budget of $600,000
the Architect failed to meet the standard of care required of him relating to advising the Owners of the probable cost of the Renovations
comprising part of the Architect’s duty was that, if he felt that he was unable to or unqualified to give an accurate estimate of costs, he should have warned of that in writing and advised the Owners to obtain an estimate from a properly qualified professional
the Architect failed to adequately advise the Owners in relation to the form and selection of the building contract
if the Architect did make any costs representations, those representations were opinions actually held by the Architect, did not include GST or furnishings and the figures provided were industry based and not reflective of what the build would actually cost
if the Architect did make any representations, then the Owners would have relied on them.

The Owners made their claim on a “no transaction” basis, that is, had the alleged representation not been made or the relevant duty been discharged, then they would not have carried out the Renovations, or transaction of entering into the building contract.

The trial judge found that the Owners had received the full value of the Renovations and therefore did not suffer any loss. Accordingly, the Owners were awarded only nominal damages for breach of contract, in the amount of $1,000.

The Appeal

There were two grounds of the Owners’ appeal. Firstly, that in having correctly found that the Architect breached the contract and negligently failed to advise the Owners about the likely costs of the building, and in relation to the selection of an appropriate building contract, by permitting the Owners to enter into a cost-plus contract with a builder who had not given a price, the primary judge erred in:

finding that the Owners did not suffer any loss
failing to assess the Owners’ damages on the basis of a “no transaction” case.

Secondly, the trial judge erred in failing to find that the Owners had not suffered loss of $451,000 in circumstances where:

had the Architect not breached his duties, the Owners would have known that they could not have achieved their stated objectives within a budget of $600,000, and they would not have entered into the building contract
the Owners had a home worth $555,000 before they entered into the building contract
the Owners spent $781,000 under the building contract and, as a result of that work, had a home worth $885,000.

In relation to the first ground of appeal, the Court disagreed with the trial judge’s finding that the Owners had not suffered loss. The Court reasoned that the Owners suffered loss as they did not receive a building to the value of their construction costs.

In relation to the second ground of appeal, the Court found that the Architect had a duty to advise on the:

likelihood of the Owners achieving their Renovation objectives having regard to their budget, before they entered into a building contract
appropriateness of any building contract which the Owners were to enter into.

Notably, the Court found that if the Architect felt himself unable or unqualified to give an accurate estimate of costs, he should have warned of that in writing and advised the Owners to obtain an estimate from a properly qualified professional. Failing to do so would be a failure to discharge his duty of care in negligence.

The Court upheld the first ground of appeal and in doing so found that the Owners had suffered loss and that such loss should be assessed on a “no transaction” basis. However, the Court refused the second ground of appeal, on the basis that there was insufficient evidence to find what a competent architect should have advised the Owners, given that the estimates of building costs and preliminary stage at which the design was developed suggested that the cost to realise the objectives of the Renovations would cost significantly more.

Put another way, in circumstances where the Owners were keen to commence building and they had received a quote from a builder for the amount of $550,000-$600,000 for works which excluded a significant portion of the Renovations, the Court found that the Owners’ position that they would have abandoned the Renovations had they known the exact cost was difficult to accept.

Further, the Court could not make a finding (due to insufficient evidence) that that Owners would not have entered into the building contract for the Renovations, had the Architect advised them that the cost of the Renovations would exceed $600,000. Had the Owners made out that point, it would have enabled the trial judge to award the damages sought by the Owners.

Accordingly, the second ground of appeal was dismissed, as was the appeal in its entirety, with costs of the appeal to the Architect.

Lessons learned

Despite the near miss for the Architect in this case, it reinforces that:

architects should consider carefully whether they have relevant expertise to provide advice on construction costs and be prepared to refer their clients to another building professional for discrete, specialist advice
any advice provided on construction costs by architects should be qualified in writing in terms of accuracy, scope, reference point and progress/certainty of design.

Authors: Christine Jones & Nicholas Achurch

In the media

Australia’s census asked about high-rise living for the first time – this is what it revealed
The 2021 census asked Australians about residential apartment buildings for the first time. On 28 June 2022, the Australian Bureau of Statistics published its findings. The census results show that there are more than 380,000 residential apartment buildings with nine or more storeys in Australia with NSW residents living in more residential apartment buildings and flats than any other state (29 June 2022). More…

$2.8 billion investment for housing
The NSW Department of Planning and Environment issued a ministerial press release stating that 2022-2023 NSW Budget will include a $2.8 billion package aiding first time home buyers and residents of regional areas in NSW. The investment aims to help consumers and the construction sector by providing schemes to help eligible residents and providing funding to boost infrastructure projects (21 June 2022). More…

South Coast council begs holiday home owners to rent out properties as housing crisis escalates
Eurobodalla Shire Council’s mayor has written letters to non-resident property owners along the South Coast of NSW in desperate plea for owners to rent out their properties for a period of two years to ease the housing crisis. There are 7,500 houses in the Eurobodalla Shire Council area that are owned by residents living in Sydney and Canberra (23 June 2022). More…

NSW Premier goes ahead with stamp duty reform as first home buyers allowed to opt out
First time home buyers will be able to make a lump sum up front stamp duty payment or opt into an annual property tax with the stamp duty reform scheme set to be available from 16 January 2023. If first time buyer choose to pay the annual property tax, it is expected the buyers will pay $400 plus .3 per cent of the land value per year. (21 June 2022). More…

National regulator in the works for embodied carbon
Construction industry stakeholders, including the Australian Institute of Quantity Surveyors, are working with the federal government to develop a framework for measuring the carbon emissions of the construction industry, including embodied carbon in materials. The current industry benchmark relies on internal measurements and reporting. The framework aims to create a channel for consistent communication and standardised measures and benchmarks for greener construction (28 June 2022). More…

Published – articles, papers, reports

2021 census results: Housing
The Australian Bureau of Statistics has published the 2021 census results for housing. ABS reports that there were 10,852, 208 private dwellings in Australia, with 70 per cent constituting separate houses, 13 per cent townhouses and 16 per cent apartments. Read the results here.

Australian Building and Construction Commission industry update June 2022
The Australian Building and Construction Commission has published its industry update for June on 23 June 2022. The industry update focuses on questions for industry participants following the 2022 Federal Election, and provides information for workplaces on how to implement the recommendations for the Respect@Work Report. Read the update here.

Consult Australia Industry Health Check June 2022
Consult Australia has published its Health Check pulse survey results for the construction industry. The results from the survey indicate a 73 per cent upturn in work – a 30 per cent increase from the survey results in September 2021. Of the upturn in work, residential buildings increased by 11 per cent. Read the results here.

Building Activity Collection quarterly survey open
The Building Activity Collection survey from the Australian Bureau of Statistics is open. The responses are published in the Building Activity, Australia and Construction Work Done, Australia, Preliminary reports quarterly. Provide your responses here.

Practice

How to use NCC 2022 – a closer look at Volume Two and the Housing Provisions
This Australian Building Codes Board resource provides the residential construction industry with an infographic and explanations for the Consistent Volume Structure in NCC 2022. The infographic explains the changes and how to the NCC are structured. Read more here.

Cases

Nelson v Ivy Landscapes Pty Ltd [2022] NSWCATAP 210
APPEAL – NSW Civil and Administrative Tribunal – internal appeal – application for leave to appeal pursuant to Civil and Administrative Tribunal Act 2013 (NSW), Sch 4, cl 12(1)(c) – new evidence not proved to have not been reasonably available at the time of the Tribunal hearing – no question of principle

Ochudzawa v Lepagier; Lepagier v Ochudzawa [2022] NSWCATCD 57
BUILDING AND CONSTRUCTION – Defects claim – oral agreement – implied term

Weston v Integra Windows and Doors Pty Ltd [2022] NSWCATAP 201
APPEALS – HOME BUILDING – responsibility of builder or supplier for defective work COSTS – procedural fairness – no opportunity to respond

GS & CS Holdings Pty Ltd v The Owners – Strata Plan No. 63227 [2022] NSWCATAP 206
LAND LAW – Strata Management – alleged unreasonable refusal of consent by lot owners to proposed amendment – pre-conditions to challenge of refusal – proper parties

Moody v M K Building Services Group Pty Ltd [2022] NSWCATAP 212
APPEAL – NSW Civil and Administrative Tribunal – internal appeal – Tribunal erred in fundamentally misunderstanding the appellants’ case and was therefore a constructive failure to exercise jurisdiction – restitution – money had and received – total failure of consideration – what is total – trivial or de minis benefit – benefit judged from the position of the innocent party – severability or apportionment of consideration BUILDING AND CONSTRUCTION – Home Building Act 1989 (NSW) – building dispute – rectification order – mandatory consideration – failure to consider a question of law

Legislation

NSW

Bills assented to by Government
Statute Law (Miscellaneous Provisions) Bill 2022 – 16 June 2022

Regulations and other miscellaneous instruments
Residential Apartment Buildings (Compliance and Enforcement Powers) Amendment (Building Work Levy) Regulation 2022 LW 17 June 2022

Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Christine Jones

Residential Focus

Who pays when the dream costs too much to build?

Background

The decision

The Appeal

Lessons learned

In the media

Published – articles, papers, reports

Practice

Cases

Legislation

Share this

Key Contacts

Christine Jones

Residential Focus

Who pays when the dream costs too much to build?

Background

The decision

The Appeal

Lessons learned

In the media

Published – articles, papers, reports

Practice

Cases

Legislation

Share this

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Key Contacts

Christine Jones