Mortgagee in possession has no right to claim Home Warranty Insurance when developer becomes insolvent

Post image for Mortgagee in possession has no right to claim Home Warranty Insurance when developer becomes insolvent

September 27, 2016

In its recent decision of Gardez Nominees Pty Ltd v NSW Self Insurance Corporation [2016] NSWSC 532, the New South Wales Supreme Court considered whether a mortgagee in possession of an incomplete and faulty development is able to call on the Home Warranty Insurer in circumstances where the developer becomes insolvent and cannot complete or repair the work.

Home Warranty Insurance is a compulsory insurance for residential building work over $20,000.00. It protects consumers from losses caused by a builder's failure to properly construct or rectify residential building work.

Gardez Nominees Pty Ltd (“Gardez”) financed the registered proprietor of land, Railway Land Holdings Pty Ltd (“Railway”), to engage Lifestyle Property Development (“Lifestyle”) to construct a residential strata development in return for a mortgage over the land. The parties entered into a side deed to the building contract in which Gardez was awarded the right to continue the development as mortgagee should Railway default on the mortgage. Home Warranty Insurance was obtained through NSW Self Insurance Corporation.

Railway defaulted on the mortgage, following which Gardez took possession of the land and took over the development. Lifestyle, the builder, then became insolvent and Gardez responded by terminating the building contract and making a claim under the Home Warranty Insurance for the costs of completing and rectifying the works.

NSW Self Insurance Corporation refused the claim and Gardez instituted proceedings against the insurer for which it was required to prove that as a non-contracting party to the building contract it was a successor in title to Railway as the developer, or a non-contracting owner under the Home Building Act 1989 (NSW).

The Court held that as no transfer of interest had taken place, Railway remained the registered proprietor of the land. Although the mortgage was recognised as a security, the Court determined that it did not give rise to a transfer of the land under the Real Property Act 1900 (NSW). This meant that Gardez as the mortgagee in possession could not be considered a successor in title to the developer under the Home Building Act and did not have the benefit of the Home Warranty Insurance.

The Court also held that the statutory warranties under the Home Building Act and benefits of Home Warranty Insurance did not benefit the mortgagee. They only benefit a non-contracting party to a building contract if the party was a non-contracting owner at the time that the contract was formed, which Gardez was not.

Previous post:

Next post: