Are you a vulnerable subsequent purchaser of a residential property?

01 July 2024

Key facts

In 2005 to 2006, Mr Raymond, a registered builder and director of Tycoon Developments Pty Ltd (Tycoon), constructed a multi-storey residential property for Tycoon. Tycoon subsequently sold the property to Mr King.

In March 2017, Mr King subsequently sold the property to Ms Lewis at an auction for $1.6 million. Prior to the auction, Ms Lewis received a building report and a pest report procured by the vendor, Mr King. The building report indicated rusting in steel columns on the subfloor that were characterised as minor defects which were ‘generally of an ongoing maintenance nature’ and did not affect the overall functionality of the residence. The pest report noted no termite damage and inadequate ant capping in some areas with timber close to the ground without protection. The reports noted that only a visual and non-invasive inspection had occurred to areas where reasonable access was available. The subfloor space was an example of an area that was not visible, accessible, or inspected.

Ms Lewis did not engage her own expert to inspect the property before the auction. She gave evidence that she relied on the vendor’s report which indicated that there were no major defects.

A few months after Ms Lewis moved into the property, she ascertained, by obtaining an independent expert report, that there was termite damage and the subfloor area was not constructed in accordance with the Building Code of Australia in that it did not allow a sufficient vertical gap between the exposed ground surface and the underside of the timber above, which increased the risk of rotting of timber, mould and termites.

Court of Appeal decision

The extent to which Bryan v Maloney (1995) 182 CLR 609 applied to this case was considered by the Court of Appeal. In Bryan v Maloney, the High Court found that a builder who constructed a house for the then owner owed a prima facie duty to the subsequent owner to take reasonable care to avoid economic loss suffered by reason of latent defects.

The Court of Appeal considered that Bryan v Maloney remains authoritative but should be considered with regard to the subsequent cases of Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 216 CLR 515 and Brookfield Multiplex Ltd v Owners Corporation Strate Plan 61288 (2014) 254 CLR 185, which confine the authority of Bryan v Maloney so that a duty will not be owed by a builder to a subsequent purchaser unless there is relevant vulnerability on the part of the purchaser at the time of purchase. The Court considered that vulnerability will exist when the subsequent purchaser is incapable of protecting himself or herself from pure economic loss sustained as a result of defects and the nature and discoverability of the defects are relevant to whether there is such incapacity.

The Court of Appeal held that there was no relevant vulnerability because:

  1. the defects were capable of being discovered prior to the auction. The defects occurred when the building was built and were not latent conditions. Whilst Ms Lewis was pregnant and unqualified to undertake an inspection of the subfloor, she had the capacity to procure an independent expert to inspect the property before the auction, which would have revealed the existing defects; and
  2. there was no reliance by Ms Lewis on the builder when she purchased the property to have built the property free from defects. Ms Lewis was satisfied to proceed with her purchase based on the vendor’s reports (despite the qualifications) and chose not to obtain the assistance of an independent building inspector prior to the purchase, which would have revealed the existence of the defects.

This decision confirms the limited application of Bryan v Maloney where subsequent purchasers claim economic loss from a builder for defects in their property.

This article was written by Lisa Vo, Partner and Tara Nelson, Senior Associate.

Subscribe to HWL Ebsworth Publications and Events

HWL Ebsworth regularly publishes articles and newsletters to keep our clients up to date on the latest legal developments and what this means for your business.

To receive these updates via email, please complete the subscription form and indicate which areas of law you would like to receive information on.

Contact us