Victorian Civil and Administrative Tribunal|2003-08-13

St George Bank v Lehmann [2003] VCAT 1040 (13 August 2003)

1. This proceeding concerns three units at 66 Doveton Avenue, Eumemmerring, Victoria. They are comprised on one title, Certificate of Title Volume 8701 Folio 721, registered at the Titles Office under the provisions of the Transfer of Land Act 1958.

2. I have been told that Eumemmerring is what one might describe as the new name for Doveton. When one looks at the certificate of title which was issued in 1967 the registered proprietor at that time was Mr Hendrikus Sonnemans of Doveton Avenue, Doveton. This would seem to support that interpretation of matters.

3. The present applicant is St George Bank Limited, which became registered proprietor of Mortgage No. T270091Q on the 24th of August 1994. The other current mortgage on the property is held by Ms Yvonne Mavis Lehmann, whose executor or personal representative, Mr Kevin Lehmann was joined as a party to this proceeding.

4. Mr Lehmann initially indicated that he would oppose the grant of the relief which the bank sought. When the matter came on for hearing before me this morning however, Ms Miller of Counsel, who represented Mr Lehmann, said that her client had withdrawn his opposition and that his position now was that he neither consented to, nor opposed the grant of the relief which was sought. In the circumstances, Ms Miller was excused from further attendance.

5. This application is brought pursuant to Section 68 of the Domestic Building Contracts Act 1995. That section provides in sub-section (1):

"(1) A person may apply to the Tribunal to have a building exempted from the operation of section 137B of the Building Act 1993.

(2) The Tribunal may exempt a building from the operation of section 137B of the Building Act 1993 if it is satisfied that--

(b) full compliance with section 137B is impossible or would cause undue hardship.

(3) In granting an exemption the Tribunal may impose any conditions it considers appropriate."

6. Section 137B of the Building Act 1993 is headed "Offence for owner builder to sell building without report or insurance". Without turning in any detail to the definition of "owner builder" the present registered proprietors of the relevant title, a Mr and Mrs Collie, appear to fall within that definition. I have been told that a principal sum which together with interest now stands at approximately $207,370.94 was advanced to the Collies by the applicant bank for the purpose of their developing this land in Doveton Avenue as owner builders. The Collies are now bankrupt. The bank is the mortgagee in possession and seeks to realise its security.

7. I have been taken to Fisher and Lightwood's Law of Mortgage, the Australian edition, published in 1995 which is to the effect that as a matter of the general law of mortgages including relevant equitable duties, a mortgagee in possession is entitled to sell a security property as is where is without conducting any maintenance of improvements and without giving any warrantees or conditions as to the subject matter of the security property sold. Those propositions are said to emerge from paragraphs [19.42] and [19.44] of the work just referred to. Without going in detail to the paragraphs in Fisher and Lightwood, these propositions appear to be correct.

8. Section 137B of the Building Act 1993 however, appears to constitute an obstacle. It provides in sub-section (2) that:

"(2) A person who constructs a building must not enter into a contract to sell the building under which the purchaser will become entitled to possess the building (or to receive the rent and profits from the building) within the prescribed period unless--

(b) the person is covered by the required insurance (if any)"

9. What then is the required insurance? The answer appears to emerge from a Ministerial order made under the terms of the Building Act 1993 by Ms Delahunty as Minister for Planning. Clause 19 of that order provides:

"Before entering into an insurable contract of sale of a building, the owner builder must ensure that -

(a) a policy is issued that complies with this Order (except Part 2); and

(b) the policy covers the domestic building work on that building."

10. It may be objected that the bank is not an owner builder, rather the Collies were the owner builders. However, if one turns to the definition of "owner builder" to be found in the Ministerial Order which appears in a special Government Gazette S82 published on the 20th of May 2002, the expression "owner builder" is defined as follows:

" `owner builder' in relation to a building, means -

(a) a person to whom section 173B of the Building Act 1992 applies; or

(b) a mortgagee in possession of the building from that person; or

11. Mr Lhuede who appears on behalf of the applicant bank, submits, first, that in the circumstances the requirements of Section 68 of the Domestic Building Contracts Act 1995 have been made out, so as to justify the grant of an exemption from the insurance requirements and secondly, that in any event, in so far as the Ministerial Order seeks to impose an obligation upon his client to provide building insurance in the circumstances, it goes beyond the powers which the Minister has. The Ministerial Order is said to have been issued under Section 135, 137A and 137D.

12. We turn to Section 135 of the Building Act 1993. We find in sub-section (1), paragraph (b) power for the Minister by Order published in the Gazette to:

"require specified classes of persons to whom section 137B or 137D applies to be covered by insurance for the purposes of that section"

13. Mr Lhuede's submission is that the empowerment given by that provision to the Minister is only to impose insurance obligations upon those who are caught by Section 137B, that is, the person who constructed the building. He said the section does not refer to mortgagees in possession. The evidence before me is that the Collies or persons working for the Collies constructed the three units which are now located on the one title. This construction was not carried out on behalf of the bank, rather it was carried out at the behest of the Collies, therefore said Mr Lhuede the Ministerial Order goes beyond power and no exemption is required. Alternatively he submits that there would be undue hardship or that special circumstances apply in the present instance.

14. The material demonstrates that there are defects and incomplete features in these units which it would cost almost $50,000 to rectify. There is a variety of views expressed as to the value of this property which has already been offered for auction once, including one valuation report which has been received on a confidential basis. Without going to the detail of that confidential exhibit, the contention put on behalf of the bank is that to outlay the moneys which would be required to rectify the defects and incomplete work in these premises would be economically unwise having regard to the likely value of the property when it was completed and rectified. Moreover, whilst attempts have been made to obtain insurance in accordance with the requirements of the Ministerial Order, they were unsuccessful.

15. Mr Lhuede submits that the evidence by no means indicates that the completion of the building and the rectification of the defects to which I have made reference would render that insurance available. Given that there was no contradictor available, the Principal Registrar of the Tribunal at my request, secured the attendance of Mr Samo, an officer of the Building Commission. He was not present for the entire hearing but did the Tribunal the courtesy of giving his view on some of the issues raised.

16. Mr Samo said that one reason why insurance would likely not be forthcoming, even in the face of completion of the building and rectification of the defects in the units was that the owner builders are bankrupt. The usual arrangement for building insurance for domestic premises is that the builder who has done the work stands behind the insurance policy and indemnifies the insurer. The insurance therefore is unlike the insurance that a motorist would take out to keep him indemnified against the consequences of negligent driving leading to property damage. There, the insurer pays and the driver is indemnified and held harmless. Here the scheme seems to be the insurer pays and then looks to the builder for reimbursement. Unless the bank were prepared to stand behind that policy, Mr Samo says, no policy would be likely forthcoming even if the necessary rectificaiton moneys were outlaid.

17. I should say without going to the detail of the evidence supporting the contentions which Mr Lhuede made, that I am satisfied that in the circumstances the provision of the insurance which upon one view is required by Section 137B of the Building Act 1993 would cause undue hardship to the present applicant. It is unnecessary in the circumstances therefore to consider whether the circumstances described are to be regarded as exceptional because of the prima facie requirements of Section 68(2) of the Domestic Building Contracts Act 1995 have been made out. However, that is not an end of the matter because the Tribunal's exemption power is introduced by the word "may". Section 45 of the Interpretation of Legislation Act 1984 says that the word "may" is indicative of a power which may be exercised or not at discretion. Merely to make out the requirements of Section 68(2)(a) or (b) or both of the Domestic Building Contracts Act 1995 does no more than given the Tribunal a discretion to grant an exemption. Further, sub-section (3) of Section 68 of the Domestic Building Contracts Act 1995 provides that in granting an exemption the Tribunal may impose any condition it considers appropriate.

18. I will put to one side for a moment the contention that the Ministerial Order has gone beyond the power in requiring that a mortgagee in possession having taken possession from an owner builder is required to obtain building insurance and consider whether upon the assumption that a mortgagee is in the circumstances before me, is so required that this mortgagee should as a matter of discretion be exempted. Mr Samo said and I agree, that the concern must be for the consequences to the public not of primarily the initial sale by the mortgagee of these premises but rather of the consequences of any on-sale by a developer or a builder who might purchase these units with a view to their completion and on-sale.

19. Mr Lhuede said that such a builder or purchaser would in the nature of things obtained and be required to obtain, domestic building insurance for the premises and that this insurance would nil to the benefit of a sub-purchaser. Mr Samo observed that any insurance that such a builder or developer would obtain would be only for the work which the builder or developer had undertaken on the premises and not for the wider condition of the premises and so the premises would, in the hands of a sub-purchaser be for the most part uninsured.

20. What then is the appropriate view to the taken of these things? I will not go in detail to the various defects which are identified in the material before me. It is sufficient to note that they are neither small in number nor trivial in nature. In my view, for this Tribunal to make an order which would launch such imperfect domestic premises on the market unconditionally would be quite wrong. The evident purpose of the Building Act and the provisions to which I have gone and the Domestic Building Contracts Act is to provide protection for consumers and purchasers of relatively new domestic building. To allow this complex of buildings to be put on the market would be potentially to create a trap and an illusion to the unwary. Of course it may be said that the sale contract could have been full disclosure of all the difficulties which attend this complex. The sale contract could and in any view, should, if the premises are to be offered, annex copies of the reports that indicate the problems that attend these premises but in my view this is not enough. The reason it is because there can be no effective guarantee that similar disclosure and similar protection by disclosure or otherwise would be made available for a sub-purchaser. A clause could be included in the contract that would require an immediate purchaser to make disclosure to the sub-purchaser but such a clause would be of dubious legal enforceability and I would have though practically of little significance.

21. Mr Lhuede has quite candidly said that what his client wants to do is to sell these premises and have an end of any liability with respect to them. The person with primary entitlement to enforce any clause in a contract of sale would be the bank and the bank has no incentive and no interest to police any further sales to a sub-purchaser, nor upon the instructions that Mr Lhuede has to the present, does the bank have any instruction either to put aside any part of the sale proceeds to provide a bond against which claims by persons suffering from defects could resort or to establish a bank guarantee (an option available to a bank which is not available to an ordinary individual or trading corporation).

22. Mr Lhuede says and it is understandable that the bank simply wants to close this account and have no contingent liabilities extending into the future.

23. In all these circumstances if it is a matter for simply granting an exemption and allowing these premises to be sold as is, where is with no insurance cover whilst I accept that hardship has been shown, I do not accept that it would be a proper exercise of my discretion so to order, in circumstances where there is nothing offered either by way of some kind of back-up substitute for a policy or by way of rectification of the existing difficulties with these premises.

24. I am fortified in this view by the knowledge that not only are there difficulties with these premises with regard to their compliance with the requirements of the Building Act 1993 and the Building Code of Australia but also with regard to their compliance with the planning law. Mr Stephens a real estate consultant who gave evidence on behalf of the applicant bank, said that whilst he did not know the full detail of the matter, the permit which was issued by the responsible authority under the planning scheme and the Planning and Environment Act 1987 had expired effluxion of time, presumably because the premises had not been completed within the time stipulated within the permit condition. To obtain a new permit would raise difficulties because the requirements for medium density housing have been modified in the interim between the issue of the original permit and its lapse by the super session of the "Good Design Guide" by the set of rules now known as "ResCode". The problem appears to be that the percentage coverage of the site is higher than is contemplated by ResCode. All in all, this complex seems to be a pandora's box. Concerns as to planning are not directly relevant to my exercise of the discretion in the present proceeding, however the fact that the difficulties with the Building Code and the Building Act are but one aspect of the problems which attend this property serves to strengthen my view that simply to allow this property onto the market as requested would be inappropriate.

25. That then brings me back to the quite difficult issue as to whether the provisions in the Ministerial Order are to be regarded as ultra vires. As Mr Lhuede has correctly observed, this is a matter which ideally one would like the benefit of submissions from the Minister or on behalf of the Minister who made the Order upon. As it is the Minister is not a party to this proceeding and so we do not have the advantage of hearing from her. The Court of Appeal in Optus Networks v Stonnington City Council [1996] VICSC 12; [1996] 2 VR 209 said:

"In an interlocutory proceeding a court and even more so a Tribunal should assume the validity of any subordinate legislated instrument."

26. This of course is not by its nature an interlocutory proceeding but it seems to me a strong thing indeed in the present circumstances to purport to make some sort of authoritative determination to the effect that a Ministerial Order is ultra vires. In these difficult circumstances I believe that the proper approach for me now to adopt is to say that if Mr Lhuede's submission on this point is correct then this application should fail because no exemption is required. If however he is incorrect and an exemption is required, for the reasons I have already given, this application should upon the basis upon which it is now advanced, fail. In the circumstances therefore I believe the proper course for me is not to elect as between the two basies for rejecting the present application but merely to reject it on the basis of the one or the other. In my view if a determination as to the validity of the Ministerial Order is to be made, the Tribunal should have the advantage of submissions on behalf of the Minister.

27. There are a number of other possible options. They entail not bringing this proceeding to a conclusion, inviting the Minister to come along and through her representative make submissions. Another option may entail the offer by the bank of some form of concession to obtain a conditional exemption.

28. Accordingly I merely indicate my reasons for not acceding to the application in the present circumstances.

Building Contracts Act 1995

Environment Act 1987

Legislation Act 1984

St George Bank v Lehmann [2003] VCAT 1040

At a glance

Court

Decision date

Source

Judgment (45 paragraphs)

St George Bank v Lehmann [2003] VCAT 1040 (13 August 2003)

Parties

Legislation Cited (4)