Title Insurance & Illegal Structures: A New Solution to an Old Problem. Paul Watkins Legal Counsel, Underwriting

Transcription

1 Title Insurance & Illegal Structures: A New Solution to an Old Problem Paul Watkins Legal Counsel, Underwriting

2 2 Title Insurance & Illegal Structures: A New Solution to an Old Problem By Paul Watkins 1, Legal Counsel, Underwriting, Stewart Title Australia 1. Introduction Despite the vendor disclosure provisions of the Sale of Land Act 1962, the issue of illegal building work continues to be the cause of significant practical concern to conveyancing practitioners acting for purchasers and vendors of real estate in Victoria. While the vendor is required to disclose to a purchaser particulars of building permits obtained within a specified period of time 2, the vendor provides no statutory or contractual warranty that the improvements erected on the land have been constructed and completed in accordance with the permits or that permits have been obtained in respect of all works carried out on the property. In circumstances where the purchaser investigates the legality of the improvements after exchange of contracts, the existence of unknown illegal structures can be potentially devastating. For vendors, any pre exchange investigation by a purchaser may bring the property to the attention of the council and render the vendor liable for the cost of any rectification work. As recent national statistics compiled by Archicentre 3 indicate that 22% of Victorian homes inspected by them reveal some form of illegal building activity 4, the introduction of title insurance into the Australian marketplace should be regarded by practitioners as a means of assisting purchasers and vendors in effectively managing some of the risks associated with illegal structures in residential conveyancing transactions. 2. The Legal Status of Illegal Structures in Victoria: The decision in McInnes v Edwards In McInnes v Edwards [1986] V.R 161 His Honour Mr Justice Kaye of the Victorian Supreme Court considered the question of whether the potential power of a local council to order the demolition of an illegal structure on a property the subject of a contract for sale constituted a latent defect in the vendor's title. 1 B Soc Sc LLB (Hons) 2 Seven years in accordance with section 32 (1A)(a) of the Sale of Land Act The building advisory service of the Royal Australian Institute of Architects. 4 Archicentre News Release 1 February

3 3 In concluding that an illegal structure which could attract the council s power of demolition did not constitute a latent defect in title, the Court distinguished between the existence of an illegal structure and the actual service of a show cause notice by council requiring rectification or compliance. The Court held that where an actual notice is served prior to the parties entering into the contract, the existence of the notice imposes a burden or charge on the land which constitutes a latent defect in the vendor s title 5. However, until a notice is actually served, the mere possibility that a council may take action in the future to remedy an illegal structure will only constitute a potential rather than latent defect in title. Accordingly, the fact that a structure may have been erected without obtaining a building permit does not impose on the vendor a duty of disclosure and does not of itself confer on the purchaser a right of rescission. This principle was subsequently upheld and followed in Queensland in the case of Delbridge v Low (1990) 2 Qd.R.317 and in New South Wales in the case of Carpenter v McGrath (1996) NSW ConvR As a direct result of the decision in Carpenter v McGrath, the New South Wales government enacted legislation resulting in the introduction of vendor warranties in relation to illegal building works 6. However, in Victoria, amendments to the Sale of Land Act 1962 effected by the House Contracts Guarantee Act 1987 have only resulted in the requirement for the vendor to give particulars of building permits obtained in the last seven years without placing any obligation on the vendor to provide a warranty that the terms of the building permit have been complied with or that building permits have been obtained for all work carried out on the property. 7 As a consequence, purchasers continue to bear the risk of the existence of illegal buildings in Victorian conveyancing transactions. 3. Practical Problems with Illegal Structures in Conveyancing Transactions In order to be satisfied that the improvements erected on a property the subject of a contract for sale have been constructed and completed in accordance with relevant building permits and will not require future rectification or demolition, it is generally necessary for practitioners to make further enquiries of the local council on behalf of their client. 5 McInnes v Edwards [1986] V.R 161 Per Kay J. at pg (d) of Schedule 3, Part 1 of the Conveyancing (Sale of Land) Regulation Kulkulka N & Cocks, R Illegal Structures the role of the consultant building surveyor Law Institute Journal, April 1991 at 259.

4 4 One of the problems associated with bringing the property to the attention of the council following exchange of contracts lies with condition 15 of Table A of the Transfer of Land Act 1958 or condition 15 of the Third Schedule of the Property Law Act 1958, which provides that the purchaser shall assume liability for compliance with any notices or orders relating to the property sold (other than those referring to apportionable outgoings) which are made or issued on or after the day of sale but the purchaser shall be entitled to enter on the property sold (without thereby being deemed to have accepted title) at any time prior to the settlement date for the purpose of complying with any such notice or order which requires to be complied with before the settlement date. Accordingly, following exchange of contracts, if the council inspects the property and discovers illegal building works and issues a notice or order requiring rectification or demolition, the purchaser will bear the responsibility and the expense of complying with the notice without any contractual or statutory right to rescind the contract. This predicament will often deter a purchaser from making any enquiries of council following an exchange of contracts, particularly where the purchaser intends to carry out renovation works in the future and is not inclined to outlay additional rectification costs prior to completion. There may also be insufficient time to arrange for a sufficiently detailed building inspection report prior to exchange of contracts. Many building inspection reports will only comment on the state and condition of repair of the improvements erected on the property and will not, unless specifically requested, check the building in its existing state against a copy of the council approved plans in order to determine whether there are any unapproved alterations or additions. Vendors are also at risk where a proposed purchaser makes enquiries of council prior to exchange of contracts. If illegal building work is discovered and the council is required to issue a show cause notice, the vendor will be required to comply with the notice and the costs associated with compliance. In circumstances where a purchaser is unable or unwilling to carry out a compliance inspection report prior to exchange, the purchaser will be exposed to the risk that the building has not been built in accordance with council approval and subsequent investigation by council may require the purchaser to demolish or rectify the building at their own cost without any recourse to the vendor. If the purchaser subsequently contemplates selling the property, the existence of unknown and undisclosed illegal building works also may expose the owner to the risk of council orders

5 5 to demolish or rectify the building where a proposed purchaser brings the property to the attention of the council. 4. A New Solution Stewart Title Australia (Stewart Title) has recently introduced a comprehensive residential title insurance policy into the Australian property market for purchasers and existing owners of residential property 8. The Stewart Title policy insures the owner of residential property against certain risks that are inherent in residential real estate transactions. These risks include defects that may not be discoverable by a search of the title, such as illegal buildings, encroachments, zoning non compliance, unregistered rights of way and easements and other transactional risks such as post settlement dealing registrations by a third party and fraud and forgery. The Stewart Title policy has been designed to transfer risk from the purchaser to the title insurer. Title Insurance coverage for illegal buildings In the context of illegal building works, the Stewart Title policy provides coverage to the insured in circumstances where the insured is ordered to demolish or rectify all or part of an existing structure due to non compliance with relevant building/or development approvals. Clause 2.1 of the Stewart Title policy provides cover where the insured purchaser is prevented by a public authority from using the land as a residence or is forced to rectify or remove all or part of the existing structure(s) on the land (other than boundary walls or fences) because: (a) it contravenes an existing zoning law; (b) of any outstanding notice of violation or deficiency notice;(c)any portion of the existing structure(s) was built or modified without building or development approvals required by law. Accordingly, under the terms of the Stewart Title policy, a purchaser will be indemnified against certain loss in circumstances where a property has been purchased that contains illegal structures, and following settlement, an order is subsequently issued by the council to rectify or demolish the building. Extent of cover under the Stewart Title policy for illegal buildings The Stewart Title policy provides an indemnity in respect of actual loss suffered by the insured, that is, the actual cost to remedy the order and any subsequent diminution in value of 8 Stewart Title s Residential Purchaser s Policy and Residential Existing Owners Policy.

6 6 the property (if any) 9. The Stewart Title policy provides coverage up to the amount of the purchase price of the property which is the policy amount. The policy amount will automatically increase in line with the market value of the land up to a maximum of 200% of the policy amount 10. There is no excess payable under the Stewart Title policy. Exclusions under the Stewart Title policy Infestation & dilapidation orders excluded The Stewart Title policy excludes certain matters from cover. Clause 3.1 of the Stewart Title policy provides that where illegal or non complying building works are disclosed in the contract for sale or are otherwise known to the insured 11, they will be excluded from coverage and the purchaser will not have the benefit of obtaining the indemnity. The Stewart Title policy will also not provide any coverage for the costs of complying with an order that is issued solely due to the dilapidation or infestation of the building. The order, whether it be to demolish or repair a building, must relate to the absence of or non compliance with, relevant building and/or development approvals by the council. Accordingly, as the Stewart Title policy will not provide any cover in respect of a structure that has been built in accordance with council approval but has been built negligently or has subsequently fallen into disrepair or has become infested, then practitioners are advised to continue to recommend that purchasers obtain a pest and building report prior to exchange of contracts. 5. Title Insurance as a Risk Management Tool In circumstances where a purchaser is unable or unwilling to make enquiries of the council prior to exchange, practitioners should give serious consideration to advising their clients to take out residential title insurance. A purchaser who takes out title insurance, rather than makes enquiries of council following exchange of contracts, will avoid the risk of being liable to comply with a possible show cause issued by the council order prior to completion. 9 Actual loss is referred to in clause 1.1 of the Stewart Title Policy under the heading Your Coverage. 10 Clause 1.4 of the Stewart Title Policy provides under the heading Your Coverage that market conditions and inflation may increase the value of your land. The amount of your insurance cover automatically increases in line with increases in the fair market value of your land after the policy date, up to a maximum of 200% of the policy amount shown in Schedule A of the policy. This added coverage is provided without additional premium. 11 Knowledge means actual knowledge rather than mere suspicion.

7 7 Following settlement, Stewart Title, rather than the purchaser, will assume the risk of the existence of any unknown illegal building works and will accordingly indemnify the purchaser against actual loss caused by the council issuing a subsequent order to rectify or demolish the illegal structures, in circumstances where the council is made aware of the illegality, either through future renovation plans or by placing the property on the market. 6. Conclusion Despite the introduction of vendor disclosure legislation in Victoria, the existence of illegal structures remains an area of significant practical concern to purchasers and their conveyancing practitioners following the decision in McInnes v Edwards. Ideally, every contract should contain a current survey report and details of current building permits or be conditional upon the provision of a survey report and building permits prior to completion. However, in practice, this is not always the case. Most practitioners will be aware that vendors are typically reluctant to enter into conditional contracts of any kind, particularly where the parties are negotiating prior to an auction. In a typical conveyance, there may not be sufficient time to meet exchange deadlines if the practitioner is required to search the records of the local council for any unfulfilled or missing building permits. For practitioners, the question of whether to advise a purchaser to make enquiries of council following exchange of contracts is becoming more problematic. In many cases the decision will depend on the nature of the property being purchased and the extent of the purchaser s knowledge concerning the property. Residential title insurance is simply one option now available to purchasers in circumstances where the purchaser either elects not to make enquiries of council prior to completion or is unable to do so. As purchasers continue to be exposed to the risks associated with illegal buildings in conveyancing transactions, conveyancing practitioners should be familiar with residential title insurance in order to comprehensively meet the needs of their clients intending to become property owners.