Termination when a Building Permit is not obtained within time – what happens to the deposit?
Updated: Aug 3, 2020
A recent case in VCAT has shed some light as to how a deposit payment will be dealt with by the Tribunal following a termination of a standard form Master Builders Association of Victoria Contract due to the failure to obtain the necessary permits for the works within time – in this case, 60 days from the date of the Contract being signed.
In this particular case, the Owners made a deposit payment to the Builder in the sum of $38,883 (5% of the Contract Sum) (“Deposit Payment”).
Following the termination of the contract, the Builder refunded to the Owners the sum of $25,599.46, but, pursuant to clause 4.2 of the contract, retained the balance of the Deposit Payment for services performed and expenses incurred under the Contract up to the date of the termination.
Whilst the Owners did not deny that the Builder was entitled to retain a portion of the Deposit Payment, they argued that they were entitled to a further refund in the sum of $8,161.34 (“Disputed Amount”).
Accordingly, the case came down to two (2) pertinent questions:
1. What is a reasonable sum for the services lawfully performed and expenses incurred by the Builder under the Contract? and
2. Subject to question 1, how much of the Deposit Payment should the Builder refund to the Owners?
Question 1: What is a reasonable sum for the services lawfully performed and expenses incurred by the Builder under the Contract?
The Builder claimed services lawfully performed and expenses incurred for as follows:
1. Site Cut;
2. Temporary Fencing Hire for a period of twelve (12) months;
3. Toilet Hire;
4. Supervisory Works on Site; and
5. Entitlement to Builder’s Margin.
The Site Cut
Whilst the Builder produced to the Tribunal an invoice from a subcontractor for the sum of $4,500, Senior Member Kirton found that the Builder was unable to substantiate all of the works claimed in relation to the Site Cut.
Accordingly, the Senior Member found it more likely than not that the sum of $4,500 was not a reasonable sum of the costs incurred.
Finding: Ultimately, a lower sum in the amount of $1,500 was allowed by the Tribunal as the Owners had conceded to same. Had the Builder been able to substantiate the higher amount, it is likely that this would have been ordered.
This is therefore a strong reminder of the importance of retaining full records of expenses incurred.
Temporary Fencing & Toilet Hire
The Senior Member found that it was reasonable for the Builder to fence the Property prior to the Building Permit being issued as it was a ‘standard part of preliminary works which may be carried out without a Building Permit’. A similar approach was taken in relation to the Toilet Hire.
Finding: The Temporary Fencing and Toilet Hire are reasonable preliminary works that the Builder was entitled to claim.
The Senior Member found that ‘as a prudent builder, [the Builder] would want to be present while the preliminary site works were being undertaken’ and that it ‘would have been necessary to travel to the site in order to meet each of the separate contractors, and that time should be included in the hours claimed’.
In addition, the Senior Member said that the fact that the contractors said that they did not need to meet the Builder on site does not mean that the Builder did not act reasonably.
Finding: The Builder was entitled for costs of Supervisory Works.
The Builder’s Margin
The Senior Member found that the Builder was not entitled to a margin on the Deposit Payment. The condition referred to only applied only to extra works and variations.
Finding: The Builder was not entitled to a margin on the Deposit Payment. Question 2: How much of the Deposit Payment should the Builder refund to the Owners?
In light of the Tribunal’s findings outlined above, Senior Member Kirton made the following orders:
1. the Owners were entitled to a further refund in the sum of $6,203.34, made up as follows:
(a) $3,000 for the Site Clean; and
(b) $3,203.34 for the Builder’s Margin.
2. the Builder was entitled to retain the balance of the Deposit Payment, being the sum of $6,080.20.
Essentially this matter came down to the Builder needing to demonstrate that the expenses incurred up to the date of termination were reasonable and validly incurred. This will of course depend upon the specific requirements of each building contract.
If you would like to discuss your rights as a Builder, or your obligations as an Owner, in relation to a termination of Contract in similar circumstances, please do not hesitate to contact Perry Thomas Lawyers on 03 8375 9638.