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Good things don’t always come in 3’s: Supreme Court of NSW Decision in Huang & Anor v Ceylan

It is, unfortunately, not an uncommon practice to see home units (and houses for that matter) advertised as having 3 bedrooms, when they were originally approved and constructed as 2 bedroom dwellings.  This practice leaves purchasers especially vulnerable if they have not done their due diligence.

In the recent case of Huang & Anor v Ceylan [2018] NSWSC 306, the Supreme Court of NSW found that the vendor breached an implied statutory warranty when they had advertised and sold a “3” bedroom unit to the purchasers when it was only approved by Council and originally constructed as a 2 bedroom unit.  The purchasers were allowed to rescind the sale contract and have their deposit returned.

Facts

Two purchasers, Mr Huang and Ms Chen (Purchasers) entered into a contract to purchase a unit at Ryde in Sydney from Ms Ceylan (Vendor) on or around 26 August 2016.  The purchase price was $900,000 with a $90,000 deposit.  The building had been constructed in 2012 pursuant to development approval for the apartment to contain 2 bedrooms.  The Vendor had advertised the unit as a 3 bedroom unit.

The additional  “third bedroom” was originally constructed as a square-shaped “media room” and had walls on 3 sides being the external wall of the apartment on the southern side, the wall of bedroom 2 on the eastern side and a wall partitioning the media room from the lounge/dining area on the western side.  The northern face was open and had no wall.

At the time of sale, a wall had been constructed on the northern side of the media room, enclosing it.

After signing the contract, the Purchasers, as a result of inquiries made of Ryde Council by a valuer retained to value the property for finance purposes, became aware that the “third bedroom” had not been approved by Ryde Council.

On 26 September 2016, the Purchasers’ solicitors served a notice purporting to rescind the contract alleging that the internal wall creating the third bedroom was illegal.  The Vendor did not accept that the notice of rescission was valid and served a notice to complete on the Purchasers.  The Purchasers did not comply and the Vendor gave formal notice of termination of the contract and retained the deposit.

In January 2017, the Purchasers inquired with Ryde Council as to whether the third bedroom had been approved. In March 2017, Ryde Council confirmed that the alteration of the unit to include a third bedroom did appear to require approval.

In July 2017, Ryde Council issued a notice to the Vendor stating that it proposed to serve the Vendor with an order under the Environmental Planning and Assessment Act 1979 (EPAA) s121B.  In short, an order (if made) required the Vendor to comply with the development consent.  In order for the Vendor to comply, the new wall would have been required to be demolished and the unit reinstated into a 2 bedroom unit in accordance with the construction certificate plans.

There was no evidence that the Vendor had made submissions against Council making such an order, or whether the Council had in fact taken further action although, the Court noted, that it remained open for the Council to take action.

The decision

The implied warranty in Schedule 3 Part 1 clause 1(d) of the Conveyancing (Sale of Land) Regulations 2010 (the 2017 version of the Regulations have not affected this warranty) provides that:

The vendor warrants that, as at the date of the contract and except as disclosed in the contract that



(d) there is no matter in relation to any building or structure on the land (being a building or structure that is included in the sale of the land) that would justify the making of any upgrading or demolition order

(emphasis added)

Justice Parker held that whether a “matter” exists “depends upon the state of the building itself”.

After looking at various provisions of the EPAA and the State Environmental Planning Policy (Exempt and Complying Development Codes) 2008 (SEPP), Justice Parker held that the building of the new wall meant it did not comply with clause 2.51 of the SEPP as “it involved the construction of a new wall (containing a doorway), rather than the replacement or alteration of an existing one” nor did it comply with clause 2.52 of the SEPP as it was an “enclosure of an open area”.

Accordingly, the Court found that it was a non-compliant development and it would be open to Ryde Council to make an order requiring removal of the wall and the reinstatement of the unit in accordance with the Council approved plans and, therefore, was a matter “that would justify the making of any upgrading or demolition order”.  On that basis, the breach of the warranty was made out and the Purchasers were entitled to rescind.

Implications

Although the findings made by Justice Parker are specific to the unit in question, the case has broad application.

Selling a house with non-approved renovations, that would otherwise require council approval, is clearly risky.  Conscientious purchasers will either walk away, or only pay a price that takes into consideration the cost to comply with the development consent. Even when a contract is exchanged unconditionally, a purchaser may rescind the contract if it becomes aware of non-complying building works prior to completion.

As a purchaser, you will need to do your due diligence if you have a suspicion that a property you are interested in may be in breach of development consent.  Some “red flags” may include extremely small bedrooms, or rooms with no windows advertised as bedrooms and bedrooms near garages.  Of course, if you proceed, then the risks to sellers also apply when it comes time to sell the property if you do not ensure compliance with development consents in the meantime.

It is advisable to call the local Council prior to signing a contract, or prior to attending an auction if you have any doubts or concerns as to whether the work has been approved, or is required to be approved, by local Council.  This applies particularly to properties that have been advertised as having been renovated.

If you are about to sell a property with existing non-complying development works, or are concerned they may be, you will need advice as to your rights and obligations.

It is possible that the Ceylan case may have had a different outcome if the vendor had included a term in the contract that specifically disclosed that the creation of the “third bedroom” was not approved by the Council and that the purchaser acknowledged that they were purchasing the property subject to the “non-compliance”.

Contact:

Clement Lo

Senior Associate

(02) 9318 6420

clement.lo@surrypartners.com.au

Peter English

Director

(02) 9318 6411

peter.english@surrypartners.com.au

This article has been subsequently published on the Australian Property Law Journal Website on 2 May 2018.