What are my rights if my investment property has defects?

High profile cases such as the Mascot and Opal Towers debacles have shone a spotlight on the issue of defects in new buildings. A recent study has revealed that a whopping 85% of new Australian buildings in the multi-residential sector have at least one defect. The commercial sector faces similar issues. 

So what recourse do investors have if there are defects in their new investment property? It's important to recognise that the laws are different in every state or territory. Here is what you need to know if investing in NSW.

Defects in a residential property 

In NSW, residential property purchases offer few, if any protections to the buyer. While in other countries sellers have obligations to disclose known defects, this is not so in NSW. In the majority of residential real estate contracts in NSW, the buyer must take the initiative to ask questions, insist on inspections and be willing to take a chance. Therefore, the responsibility lies entirely with the buyer to protect themselves against purchasing a substandard property. 

The most prudent action a residential property investor can take is to insist on time to thoroughly inspect and review the property they are considering purchasing. If the seller refuses to allow for any type of inspections, or insists on controlling the choice of inspector, it might be best to move on to another buying option.

Defects in a commercial property

Commercial property purchases offer a bit more protection to the buyer. The contracts for the sale of large commercial buildings usually will include options for the repair or replacement of defective materials, workmanship or a failure to meet specifications. However, this type of protection is not necessarily standard, so contracts must be reviewed carefully and addendums added to include these types of protections.

First, it is important to define the types of defects you might want included for repair and/or replacement in your contract. Some defects you would want to include might be:

• Substandard workmanship
• Poor materials quality
• Improper installation of pertinent items
• Non-compliance with building specifications
• Violations of necessary codes and regulations

Next it is imperative to understand how a builder can be held responsible for curing the defects that present themselves. Most contracts will include a period of time where the builder will be legally required to cure a defect. This period is called the “defects liability period.” Some of the characteristics of this clause include;

• Time Frame; how long will the period be in effect for?
• Start Date; when will the period of legally mandated repair start?
• Completion of Repair; will repairs of noted defects have to be finished before legal ownership changes hands or will the builder be allowed back on site to make repairs after the property has closed?
• Responsible party; will the original builder be responsible for curing the defects during the liability period or will the owner need to contract out and seek reimbursement from the original builder?
• Cure Time; how long will the builder have to make a repair once a defect is identified and notice is given?
• Defects Not Anticipated; what will the criteria be to determine and qualify a defect that is not specifically identified in the contract?

While this is not an exhaustive list, it does represent some of the more common issues that should be addressed when drafting a liability defects period clause.

Can damages be recovered for defects in property?

This question is a bit more complex. While damages can be recovered for breach of contract, it is likely that the contract will contain language that will define or limit the manner and amount of damages that can be recovered by the purchaser. If the cost of repair for damages exceeds that which was predetermined, and the excess is both reasonable and unexpected, it is possible that the courts will find the liable party responsible for the entirety of the costs.

The most effective way to avoid buying either a residential or commercial property with defects, is to have the property inspected by a neutral third party. Then, if defects are found, the parties can either contract for the repairs prior to purchase or decide to move on to another venture. In the event that the property is under contract for construction, then it is imperative that the parties come to some contractual agreement as to how future identified defects will be cured.