What are defects and how does a defects liability period work?

While every builder dreams of the perfect build without so much as a single fault being found with their work, the reality of most construction projects is that at some stage issue will be taken with some or all of the work and a defect complaint will arise.

It is therefore important to understand exactly what is meant by the term ‘defect’, how a contractual ‘defects liability period’ works in practical terms and also whether there is any right to claim damages for covering the costs of rectifying a defect.

What exactly is a ‘defect’?

Ordinarily, where the term ‘defect’ is used in a construction contract it refers to work that has not been performed in accordance with the standards and requirements of the particular contract.

Matters to take into consideration in determining if there is a defect may include:

  • the quality of any work and the standard of workmanship;
  • whether design directives have been followed and correct materials have been used; and
  • whether the works have been performed in accordance with contractual specifications and drawings.

The ‘defects liability period’ and how it works

Most experienced builders and contractors would be familiar with the term ‘defects liability period’ as the term commonly appears in construction contracts including contracts based on pro forma Australian Standards building and construction contracts.

A defects liability period is the time period specified in the contract during which a contractor is legally required to return to a construction site or build to repair any defects which have appeared in that contractor’s work since the date of construction. Usually a defects liability period will start either at practical completion or upon reaching standard completion.

Even if you are familiar with the term, it is important to check each new contract carefully to ensure you understand how long the defects liability period is and what is expected of you during that period.

A contract will specify the length of any defects liability period. Anywhere from 12 to 24 months is a fairly common period, although longer or shorter periods are also possible.

The length of any defects liability period will depend on the nature of the build, the type of work a particular contractor carries out and whether it is likely that any inherent defects may take time to become apparent. For example, it is not uncommon for contracts involving complex builds and large government contracts to specify longer defects liability periods than a simple domestic building contract.

Why specify a defects liability period in a contract?

A defects liability period gives both a principal and contractor a degree of certainty as to the process that will be followed for making good any defects which may not be apparent at the date of practical completion.

In addition, a defects liability period can also be useful in providing a means of making good any defects that are apparent at the time of practical completion but which either do not need to be rectified prior to practical completion or perhaps cannot be easily rectified due to the presence of other contractors and trades still working on the build.

Wherever possible, it also makes practical sense to have the contractor who carried out the original work return to fix any defect as this contractor will be familiar with the site and the work in question. This is likely to be the most cost effective approach to any rectification work. Also, a contractor may prefer to be the sole party authorised to carry out any rectification work within a given period as the quality of the work and any subsequent repairs will potentially affect a contractor’s reputation.

Once a defect is fixed does a new defects liability period commence?

Whether a new defects liability period applies to rectified work will depend on the terms of each particular construction contract. It is important that both the principal and contractor are clear on this point prior to entering into a contract.

What right to damages exists for covering the costs of rectifying a defect?

Ordinarily any defect would be a breach of contract.

There have been several cases where the courts have considered whether the existence of a defects liability period in a contract alters or removes the need for a common law right to damages with individual cases appearing to turn on their particular facts and the behaviour of the parties to the contract.

Generally, damages for any defects will cover the amount needed to ensure that the work is brought up to the standard that a contractor was initially required to provide under the contract.

Depending on the particular circumstances of a build, damages could include recovery by the principal of any costs of reasonable demolition and rebuilding work and any secondary or incidental costs such as loss of income (if the property is unable to be rented out due to the rectification works) and ancillary costs such as relocation expenses (say if tenants are involved), or additional consultant’s fees directly related to the rectification works.

If circumstances dictate that carrying out rectification work in respect of the defects is not reasonable, for example if a building is so damaged or defective to make the work needed impossible or impractical to carry out, a principal may be able to recover damages for any loss in value of the building and (in very limited circumstances) possibly for loss of enjoyment or inconvenience suffered (where there is no actual loss in value of the subject property but the principal, for whatever reason, is unable to use and enjoy the building as previously planned).

Help is available

It is always prudent to seek advice prior to entering into any contract to ensure that you fully understand your rights and responsibilities.

If you have already entered into a contract or carried out work and a complaint has now been made that your work is defective, you may be concerned about both your professional reputation and any potential financial implications for your business.

If you find yourself in a situation where this could be an issue we recommend you seek legal advice as soon as possible. If you or someone you know wants more information or needs help or advice, please contact us on (02) 9963 9800 or email law@etheringtons.com.au.

Understanding a Commercial Lease

When renting a property from which you intend to run a business, it is important for both Landlords and Tenants to understand the relationship they are entering into and the rights and obligations that they each have. The document that governs this relationship is usually a Commercial Lease.

So, what is a Commercial Lease?

A lease is a legally binding contract that gives you certain rights to a property for a set term. A commercial lease is used when leasing property that is used primarily for a business.

You should never sign a lease without understanding all of its terms and conditions. If you don’t understand what you are agreeing to you could experience serious financial and legal problems.

It’s important to properly investigate the property and lease document before you sign. It is a good idea to ask your lawyer to explain each clause of the lease to you. Your lawyer can give you legal advice, draft new clauses and help you negotiate the terms and conditions to suit you.

Important issues to consider when entering into a lease

A commercial lease will usually contain terms dealing with items such as:

Rent: How much is the rent and when is it due? The amount of the rent will usually be calculated based on the area of the premises. This may not always be as simple as it sounds. For example, if the shape of the property is irregular or the area includes a lift, more than one floor, outdoor area or interior walls.

Rent Increases: Rent will usually increase annually during the term of the lease, with increases determined by a fixed percentage, market based values or tied to the CPI. It is common for CPI or fixed reviews to occur during the term of a lease and for a market review to occur at the expiry of the initial term and each option period.

Security Deposit: The landlord will usually ask for some form of security from the tenant in case the tenant defaults on their obligations (eg.not paying rent). The security is usually for an amount equal to 3-6months’ rent and is by way of bank guarantee or security deposit. If the tenant is a company then personal guarantees from the company’s directors may also be required. The lease should also specify the terms regarding its return.

Term of the lease: The lease should set out the length of the lease and any options to renew the lease and any terms relating to the renewal. A landlord will generally want a longer initial lease term (typically 3, 5 or 10 years)whereas the tenant is likely to want a shorter period (1-3 years).

Option to Renew: An option allows the tenant to continue leasing the property on similar terms at the end of the period of the lease for a further defined period and rent (subject to any review). An option gives the landlord potential greater security of income and the tenant the ability to make longer term plans for their business.

Knowing the procedure for exercising the option, especially when the option can be exercised, is critically important

Improvements: A lease should address what improvements or modifications can be made to the property, who will pay for the improvements and whether the tenant is responsible for returning the property to its original condition at the end of the lease.

Description of the property: The lease should clearly describe all of the property being leased, including bathrooms, common areas, kitchen area and parking spots. A plan of the property should also be included.

Signage: Any restrictions on putting up signs, say that are visible from the street, will be included in the lease. Also, check local zoning regulations to determine what other limitations may apply.

Use of the property: Most leases will include a clause defining what the tenant can do on the property (eg. What type of business). A tenant should ask for a broad usage clause just in case the business expands into other activities. Ask your local council if your business can operate in your desired location. Also consider the council’s development plans for the area.

Outgoings.The lease will set out who is responsible for costs like utilities, property rates & taxes, insurance, and repairs.

Insurance.You should contact your insurance company and discuss the clauses referring to insurance so you fully understand what is covered by the lease.

Exclusivity clause: This is an important clause for retail businesses renting space in a commercial complex. An exclusivity clause will prevent a landlord from renting space to a competitor.

Assignment and subletting: A tenant should maintain the right to assign the lease or sublet the space to another tenant. Usually the tenant is still ultimately responsible for paying the rent if the business fails or relocates,but with an assignment or sublet clause in place, the business can find someone else to cover the rent.

Maintenance & Repair: The lease should clearly set out who is responsible for maintaining or repairing the property and the fixtures and fittings during the term of the lease.

Make Good: A tenant should carefully review the make good obligations in the lease.  Often these can be onerous and involve considerable expense on the tenant having to reinstate the premises to their original condition when the lease commenced.

Termination: The circumstances under which the lease will be terminated should be set out in detail in the lease.

Costs: The landlord may want the tenant to pay the costs of preparing the lease, this should be clearly set out in the lease.

Retail lease or general commercial lease?

The Retail Leases Act 1994 has specific legislation relating to retail leases. This legislation is designed to promote fair leasing arrangements, improve communication and provide access to low cost dispute resolution for the retail industry.

For a new retail lease the landlord is legally required to give the tenant:

  • a written lease with matters agreed to and signed off by both parties.
  • a disclosure statement.
  • the NSW Retail Tenants Guide, which gives notice of some of the tenants’ rights and obligations and some commercial matters that the tenant should be aware of.

The disclosure statement outlines important information about the lease, it must be in the prescribed form and contain a statement notifying the tenant that independent legal advice should be obtained. It would also normally include details about:

  • the term of the lease
  • whether there are options for further terms
  • the occupancy costs for leasing the premises (including rent and any outgoings)
  • specific information for shopping centre leases
  • tenant’s fit out requirements
  • if there are any relocation or demolition clauses

Conclusion

Although many of the terms of a commercial lease are fairly standard it is important that you fully understand your rights and obligations, especially the provisions which relate to retail leasing.

It is a good idea to ask your lawyer to explain what each clause in the lease means and to get their assistance in negotiating the terms and conditions that suit you.

If you or someone you know wants more information or needs help or advice, please contact us on (02) 9963 9800 or email law@etheringtons.com.au.

Top 6 Power of Attorney Questions

A Power of Attorney is a legal document that gives a trusted person the legal authority to act for you and to make legally binding decisions on your behalf.  If you do not have a Power of Attorney then you should contact us and find out more.

Below are 6 top questions dealing with Powers of Attorney.

Circumstances when a Power of Attorney is particularly useful:

  • to relieve yourself of the day-to-day demands of financial paperwork and record keeping;
  • as a safety net when travelling or to allow someone to handle your affairs in your absence;
  • to avoid burdening family or friends with the responsibility of looking after your affairs; or
  • if you are unable to manage your prosperity or financial affairs.

Does the Attorney need to be a lawyer?

The person appointed does not need to have legal qualifications – you can appoint anyone, although deciding on the person to be appointed should be done with careful thought as you are providing them with considerable power.

An ideal attorney should:

  • have integrity;
  • be willing to act in that capacity;
  • have competence in areas of relevance;
  • be able to act in a business-like manner;
  • be able to spare the time necessary for the task;
  • live in the locality in which they are to act;
  • be agreeable to respecting the confidentiality of the donor’s (the person giving the Power of Attorney) affairs; and
  • be impartial and have no known conflict of interest.

Are there different types of Powers of Attorney?

Yes, there are two types:

A General Power of Attorney which is:

  • only valid while you have legal capacity;
  • useful if you are going away for an extended period and you do not want the authority to continue should you lose legal capacity; and
  • usually drawn up for a specific purpose with specific or general powers.

And an Enduring Power of Attorney (EPA) which:

  • continues to be valid even if you lose legal capacity due to disability or illness;
  • may empower your attorney to make financial, property, lifestyle and health decisions;
  • may be activated when required or upon loss of legal capacity; and
  • allows your attorney to commence or to continue to manage your affairs even though you have become unable to give lawful instructions.

Is it better to have more than one attorney?

We recommend that you do have more than one attorney, or a substitute attorney if the appointed attorney cannot act or continue to act, as it gives you more flexibility.

Some examples to illustrate why it is helpful include: siblings who should act together, or you are unsure if one should act on their own, or to allow the power to continue if one attorney dies or cannot act. This also applies if you appoint a spouse and a child as an alternative in the event the spouse dies. You can also appoint attorneys to act “jointly” (this means they must agree on everything) or “severally” (this means one of the appointed persons can make decisions alone).

Should I pay my attorney?

This is not necessary to give legal effect to the power, and for a financial power would normally only be considered if the attorney is a professional.

How do I know if the person has sufficient mental capacity to make a power of attorney?

There is no simple formula, but in general terms they must be able to:

  • understand the major consequences of a decision;
  • take responsibility for making that choice; and
  • make a choice based on the risks and benefits that are important to them.

If there is any doubt about capacity, it’s best to get in touch with a medical doctor and ask for a written opinion. Remember, different powers require different levels of understanding. If a medical opinion about capacity is sought, it is wise to have the Power of Attorney signed on the same day as you get the medical report so there can be no subsequent claim that the appointment was invalid.

In our view many clients do not recognise the possible benefits (and pitfalls) of Powers Of Attorney.

The need fora Power of Attorney can be numerous.  In case of accident, sudden illness,planned or unexpected absence, or when you just can’t cope, you may need someone to manage your financial affairs. So it doesn’t matter if you are old or young, in business or not, if you do a lot of travelling or not, there are great benefits in having a power of attorney.

To find out more about Powers of Attorney and their benefits call us on (02) 9963 9800 or email law@etheringtons.com.au.

Have you been left out of a Will?

The loss of a family member is always a difficult time, but it can become even more distressing to learn that you have not been included in the family member’s Will.

Generally, a person may leave their assets to whomever they wish. However, the law recognises that there are those who relied on the deceased for support who can sometimes be unfairly left out of the deceased’s Will. Such people are able to make a claim so that their needs are adequately provided for.

In these circumstances a person can consider challenging the deceased’s Will or contesting the Estate. There are two main ways that this can happen:

  1. The validity of the Will may be challenged on the basis that the Will maker did not have the legal capacity to make the Will, or didn’t understand what they were signing; or
  2. A claim can be made under the Succession Act on the basis that the Will maker failed to provide for a family member where they had a moral obligation to do so.

Under the Succession Act, only persons who qualify as eligible persons under the Act may apply to the Court. There are seven categories of eligible persons, namely:

  1. The wife or husband of the deceased when they died;
  2. A person in a de facto relationship with the deceased when they died (including same sex partners);
  3. A child of the deceased;
  4. Former wives and husbands of the deceased or former de facto partners of the deceased, who were receiving or entitled to receive maintenance from the deceased when they died;
  5. A grandchild of the deceased, in certain circumstances;
  6. A step-child of the deceased in certain circumstances; and
  7. A parent of the deceased.

To show that you are entitled to receive some benefit from the estate you must show that the deceased had an obligation to provide for you and that you have been left without adequate provision for your proper maintenance, education or advancement in life.

It is important to note that inheritance claims are subject to a strict time limit, which is 12 months after the date of death.

You may not need to go to court as most parties encourage mediation to avoid unnecessary legal costs or any lengthy delays.

If you are concerned, please be sure to contact us as soon as possible or you may be prevented from making a claim. It is usually a good idea to try and get a copy of the last Will of the deceased so that you can discuss the details with us more accurately.

If you or someone you know wants more information or needs help or advice, please contact us on (02) 9963 9800 or email law@etheringtons.com.au.

Buying a property at auction – things you need to know BEFORE the auction day

Buying a property can often be an intimidating process, especially at auction where you are competing with other buyers and there is no cooling off period.

Many properties are sold at auction, particularly in a rising market, so it is important for buyers to understand the processes involved so they can bid confidently on the auction day.

There are many things that need to be done before the auction to ensure that your interests are protected and that you are fully informed about the property you are intending to buy; these things are outlined below.

Contract Review

The most important thing to do is to take the contract of sale to your lawyer well before the auction date.

Your lawyer will review the contract, advise you of any risks and help to protect your interests by identifying any terms that might need to be negotiated on your behalf or that you wish to have altered, for example, longer settlement periods, reduced deposits and/or additional terms and conditions.

Your lawyer will also make sure you are buying exactly what you intended to and that it’s in the condition you expect by arranging any pre-auction inspections that should be carried out, such as building and pest inspections.

If you are the successful bidder at the auction the reviewed contract can be signed with confidence.

Inspect the Property

You should thoroughly inspect the property before the auction day and satisfy yourself that all inclusions are in proper working order and that the gas, water and electricity are functioning properly.

If you are successful on the auction day you will be buying the property ‘as is’.

Research

Thoroughly research the area and surrounding suburbs before the auction day, so that you are comfortable about the amount you are prepared to pay for the property, and can bid confidently.

Finance

Make sure that you have your finance in order before making an offer. If you are obtaining mortgage finance, you should have your finance unconditionally approved not just pre-approved. Confirm with your lender the maximum amount you can borrow.

Pre-approval is not confirmation of how much the lender is willing to provide you, it is an indication of what you might be able to borrow depending on the value of the property, which is determined by a formal valuation after the auction.

It is important to ensure that you have adequate funds available to complete the purchase within the timeframe stipulated in the contract.

Deposit

If you are the successful bidder, you will be required to pay a deposit cheque or deposit bond (usually 10% of the purchase price) immediately following signing of the contract.

Register to Bid

To participate or bid at an auction, buyers must register with the selling agent and be given a bidder’s number. You can register with the selling agent at any time prior to the auction, such as when you inspect the property, or on the day itself.

To register you must provide ID, a card or document issued by a government or financial institution showing your name and address, for example:

  • driver’s licence or learner’s permit
  • vehicle registration paper
  • council rates notice.

If you do not have this kind of proof of identity you can use two documents that together show your name and address.

Reserve price

Before auctioning a property, the seller will nominate a reserve price, which is usually not advertised. If the bidding continues beyond the reserve price, the property is sold at the fall of the hammer.

Bidding

Make sure you have a strategy going into the auction and that you set yourself a maximum purchase price. Stick to that maximum price. If you feel as though you may be too emotionally attached to bid at the auction yourself, then organise with the Agent to have someone bid on your behalf. If you elect to do so, you must provide a written signed authority to the Agent authorising the person to bid on your behalf.

Successful Bidder

If you are the highest bidder, immediately following the auction, you will be asked to:

  • provide your contact details to the Agent;
  • sign the contract of sale; and
  • pay the deposit.

You will be entering into an unconditional and legally binding contract. There is no cooling-off period.

The signed contract will then be delivered to your solicitor’s office and they will contact you to discuss the next steps.

Conclusion

Getting the right advice, being fully informed and prepared before the auction day is a critical part of ensuring that the purchase of your next (or first) property runs smoothly.

The purchase of a property, at auction or otherwise, should not be unduly stressful and our expert team can help guide you through the process and make sure your interests are protected.

If you or someone you know is looking to purchase a property at auction and needs help or advice, please contact us on (02) 9963 9800 or email law@etheringtons.com.au

Personal Liability for Company Directors

A company is an association incorporated under the Corporations Act 2001 (Cth) (the ‘Act’). The effect of incorporation gives the company a separate entity, distinct from its directors and shareholders. It can enter into contracts, sue and be sued in its own right.

The Australian Investment and Securities Commission (ASIC) is the Government body authorised to administer the Act and may investigate and impose civil and criminal penalties for breaches under the Act.

As the company is a separate legal entity, generally its directors are not personally liable for the company’s actions. However, increasingly, ASIC and creditors of companies that have limited assets are pursuing recovery personally from company directors who may have breached their duties under the Act.

In certain circumstances, directors can be held personally liable for losses of the company. Some of these circumstances include:

  • Insolvent Trading;
  • Personal Guarantees;
  • Breaching directors’ duties;
  • Taxation debts and superannuation contributions; and
  • Phoenix activity.

Insolvent Trading

The Act prohibits a company from trading whilst it is insolvent.

Because a company is a separate legal entity, directors and shareholders are generally protected from being personally liable for the company’s debts. This protection may be abused when directors allow companies to continue trading and incurring debt despite warnings of potential insolvency.

To circumvent unscrupulous or reckless trading, the Act provides that directors who allow a company to trade whilst insolvent will be in breach of both civil and criminal provisions of the Act and may be liable for its debts.

There are certain defences available and directors may not be liable if:

  • they had reasonable grounds to expect the company was solvent at the time the debt was incurred and would remain solvent after that time; or
  • at the time the debt was incurred they did not participate in management due to illness or some other good reason; or
  • they took all reasonable steps to prevent the company from incurring the debt.

Arguably, the threat of being personally liable for insolvent trading could cause directors who are facing transient cashflow issues to succumb to the early appointment of an administrator, despite good prospects of survival. To find an appropriate balance between encouraging enterprise and protecting the community, additional protections for directors have been introduced.

The safe harbour provisions are available to directors who take positive steps that are reasonably likely to result in a better outcome for the company than administration or liquidation. Directors will not be liable for the debts of a company incurred whilst it is insolvent if:

  • after suspecting the company is in threat of insolvency, the directors begin to develop a course of action that could reasonably be likely to lead to a better outcome for the company than immediate administration or liquidation; and
  • the debts were incurred directly or indirectly in connection with this course of action.

Factors that may establish that a course of action would likely lead to a better outcome include:

  • whether the director properly informed himself / herself of the company’s financial position;
  • whether the director prepared a plan to improve the financial viability of the company such as a restructure;
  • whether the director retained a suitably qualified person to advise on the restructuring;
  • the taking of appropriate steps to prevent any misconduct within the company that could adversely affect its ability to pay its debts.

Directors generally cannot rely on the safe harbour provisions in circumstances where the company has failed to meet its obligations for employee entitlements as they fall due, failed to maintain accurate financial accounts and records, or failed to substantially comply with its reporting and filing requirements under Australian taxation laws.

Personal Guarantees

A personal guarantee is a separate agreement between a director and a creditor where the director of a company agrees to pay a debt of a company in the event that the company does not make payment.

This could include a director providing security over personal assets such as a home.

Breaching directors’ duties

Under the Act, directors have certain duties that must be complied with.

Where a breach of any of these duties is committed and the company suffers a loss, directors can be personally liable.

In these circumstances, civil and criminal penalties under the Act will apply, including paying compensation to the company.

Taxation debts and superannuation contributions

Directors are personally responsible for companies complying with Pay As You Go (PAYG) withholding and Superannuation Guarantee Charge (SGC) obligations.

Where these obligations are not met by a company, a director can become personally liable for non-compliance and be penalised.

Phoenix Activity

This activity occurs where the directors of a company place it into administration or liquidation to avoid payment of creditors but continue the business under a new company name.

Not only can it result in civil and criminal penalties for directors, it can also result in a term of imprisonment.

Conclusion

Company directors hold a position of power and trust. The risk of personal liability is real but manageable and should not deter you from pursuing business and employment opportunities.

The best ways to meet the obligations of being a director are to become familiar with your duties and to understand the legal obligations and the situations which could give rise to personal liability, to be involved in the affairs and operations of the company and to obtain professional advice and assistance when needed.

If you or someone you know wants more information or needs help or advice, please contact us on (02) 9963 9800 or email law@etheringtons.com.au