Vikram Misra, Barrister at Clarence Chambers continues his series into caveats as he discusses how caveat clauses should be drafted in residential building contracts, in accordance to s 7D of the Home Building Act 1989 (NSW). To hear more from Vikram, follow his series here.
Terms in residential building contracts that purport to grant a builder an interest in the owner’s land and also a right to lodge a caveat over the owner’s land, must accord with section 7D of the Home Building Act 1989 (NSW) (“the Act”). It is therefore vital that practitioners have a thorough understanding of the requirements of the section to advise clients as to the proper form that such clauses must take in order to be valid.
Section 7D acts as a consumer protection provision[1] and effectively prevents types of caveat clauses in residential building contracts such as that in Griffith v Hodge (1979) 2 BPR 9474[2].
Broadly, the scheme of s 7D is to provide[3]:
- Firstly, that a provision in as residential building contract not give the holder of a contractor licence a legal or equitable estate or interest in any land (except where sub-section (3) is attracted);
- Secondly, that such a contractual provision which purports, contrary to the express words of s 7D(1), to create such an interest in land is void to the extent that it purports to achieve that effect;
- Thirdly, that the holder of a contractor licence may not lodge a caveat in respect of an interest prohibited by sub-section (1); and
- Fourthly, that sub-section (1) does not apply to such a contractual provision if the requirements of sub-section (3) are satisfied. The corollary of this is that where a charge is not prohibited by sub-section (1), it is permissible to lodge a caveat in respect of an interest so created.
To be valid and enforceable, a caveat clause under a residential building contract must satisfy the criteria in s 7D(3), being:
- the land, the subject of the charge, is land in which the contract work is, or is to be, carried out, and
- the charge is in favour of the holder of a contractor licence who is a party to the contract, and
- the charge is created to secure the payment to the holder of the contractor licence, by another party to the contract of money due under the contract, but only if a court or tribunal has made an order or judgment that such payment be made, and
- in the case of a charge over land under the Real Property Act 1900 – the party to the contract against whom the judgment or order is made is the registered proprietor of the land.
In Kell & Rigby Pty Ltd v Flurrie Pty Ltd [2006] NSWSC 906, one of the issues before the Court[4] was the construction of the second limb of the requirement in 7D(3)(c) – “but only if”. The Court held:
[61] The construction of the second limb of s 7D(3)(c) as a qualification of criterion (c) only, forming part of the definition of the terms of a permissible charge, rather than a qualification of the entirety of sub-s (3), describing an event precedent to enforceability, is indicated by the combination of the considerations first, that it is the more natural reading of requirement (c) in its context, in that the end of criterion (c) would be a most curious place to find a proviso intended to qualify the entire subsection, as distinct from qualifying criterion (c) only; secondly, that the alternative could be reached only by construing “void” to mean “temporarily unenforceable”, itself an unlikely proposition; and thirdly, that it is more consistent than the alternative with the legislative intent evinced in the Second Reading Speech and the structure of the section as a whole.
As such, it follows that the effect of s 7D(3) is that a contractual provision in a residential building contract which creates a charge is not void if the charge arises only upon a court or tribunal ordering that the proprietor of the land pay moneys due under the contract and secures only moneys so ordered to be paid, on the land on which the building works are performed. In those circumstances, sub-section (2) does not prevent the holder of a contractor licence lodging a caveat in respect of an interest created by such a provision.
Key takeaways:
- Caveat clauses that create a charge and a caveatable interest, with immediate effect, even though no moneys are yet due under the residential building contract fall foul of section 7D of the Act.
- When reviewing a caveat clause in a residential building contract, care must be taken to check that the clause only creates a charge where a court or tribunal has made an order or judgment that moneys due under the agreement be paid.
[1] Kell & Rigby Pty Ltd v Flurrie Pty Ltd [2006] NSWSC 906, [13] (‘Kell & Rigby”).
[2] I.e. clauses that create a charge and a caveatable interest, with immediate effect, even though no moneys are yet due under the building contract.
[3] Kell & Rigby [2006] NSWSC 906, [15].
[4] The Court also considered inter alia, whether judgments obtained by a party to a residential building contract by registration pursuant to the Building and Construction Industry Security of Payment Act 1999 (NSW) satisfy the description of judgments that the relevant order or judgment be one for the payment of “money due under the contract”.
Vikram Misra was admitted as a solicitor in 2012 and called to the NSW Bar in 2015. He maintains a broad commercial practice and is regularly briefed in matters relating to taxation law, property law, construction law and equity. Vikram has completed a Graduate Diploma in Taxation Law at the University of Sydney in 2015 and a Master of Laws majoring in construction law and contract law at the University of Melbourne in 2016. You may connect with Vikram via email counsel@vikrammisra.com or LinkedIn 
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