Home Building Contract(s) – Can they be mutually terminated?

The Housing Industry Association (HIA) being the official body of the home building industry in Australia assists its members in developing contracts for residential construction industry. The contracts have been prepared and amended from time to time to comply with the legislations and regulations that apply to the home building industry in each State.

The contracts set out in rights and obligations of the builder and the homeowner, including timeframes by when each party is to fulfil his/her/its obligations and circumstances when one party to the contract is entitled to terminate the contract for non-fulfilment of the obligations by the other party to the contract.

A few weeks ago, a couple visited my office and instructed me that nearly seven (7) months ago they executed a Lump Sum Building Contract (the Contract) with a builder to construct a house on a block of land they own. The Contract provided that the builder was to prepare the building plans and seek the local council’s approval within two (2) months and complete construction of the house within eighteen (18) months from the date of execution of the Contract. The couple paid an initial deposit sum to the builder to progress with preparation of the building plan. Since execution of the Contract, the building plans were required to be amended twice due to changes in the local council requirements such that the building plans were not submitted to the local council for its approval. Both the builder and the homeowners discussed various options available to them, which included but were not limited to extending the time to complete the construction of the house. The homeowners’ instructed me during the last seven (7) months their circumstances have significantly changed, and they were not in a position to await for a further period of time for the builder to complete construction of the house.

The homeowners sought my advice as to whether or not the builder and they could negotiate to mutually terminate the Contract to the effect that the parties’ respective responsibilities and obligations under the Contract will come to an end. I advised the homeowners that both parties to a home building contract are entitled to mutually terminate it by executing a deed of mutual termination. In general, a deed of mutual termination is to be prepared when:

(a) both parties agree to end the contract and there is still something required to be completed under the contract such as payment, or rectification of defects; or

(b) the parties do not want to initiate any action(s) pursuant to any clause in the building contract, which may ordinarily arise as a result of termination, for example the deed may allow the parties to avoid issuing breach notices and termination which may lead to claims for costs and damages by one party; or

Subsequent to negotiations between the homeowners and the builder, both parties agreed to mutually terminate the Contract with the homeowners compensating the builder towards the administrative costs, disbursements and other expenses incurred by the builder until the date of execution of the deed.

The homeowners instructed me to prepare the deed of mutual termination of the Contract incorporating the mutual agreement between the builder and them. The builder reviewed and sought independent legal advice on the proposed deed of settlement and both parties executed the deed

The key terms and conditions in a deed of settlement and release between the homeowners and the builder to mutually terminate a home building contract, may include but may not limited to:

(a) Background details;

(b) Settlement terms between the parties – the sum of money to be paid or any other action(s) to be taken in full and final settlement of termination of the building contract, the date and method of payment and what happens in the event of non-payment of the settlement sum or a breach of terms of the deed;

(c) Release and waiver – parties release one another from any claims relating to the building contract and waive their respective rights to demand performance of any outstanding obligations or claim damages;

(d) Bar to action – both parties are prevented from bringing any further action, claim or demands against each other in relation to the terminated contract;

(e) Mutual disparagement – a clause that prevents either party from damaging the other’s reputation;

(f) Confidentiality – a clause requiring both parties to keep the terms of the deed and all associated details relating to the deed confidential.

Parties to a home building contract may negotiate and attempt to mutually terminate a home building contract without engaging in an expensive and arduous litigious action.

Please note that any information included in this article is general information only and does not constitute legal advice. Please contact us to discuss your particular circumstances.

Archana Luktuke8 October 2021

Mr and Mrs Joe Bloggs contacted me to seek legal advice on a proposed commercial lease provided by the real estate agent for their upcoming coffee shop in suburban Perth.

Mr and Mrs Bloggs were being rushed into signing the proposed lease, which they were not comfortable with. They started by explaining how their friend, who runs a hair dressing salon, was provided with extensive written information and a proposed lease to review before executing it. This was in stark contrast to a small seven-page template that they received by way of a proposed lease from their letting agency. I explained to Mr and Mrs Bloggs that their friend and they are subject to separate leasing legislation, however their due diligence before signing the proposed lease will assist them in the long run. In Western Australia, leases for commercial premises can be categorised as retail leases and commercial leases. It is important to note that all commercial leases in Western Australia are not governed by the same legislation.

A summary of the safeguards that a potential lessee of a commercial lease must consider is discussed below.

Retail Leases

Retail leases are governed by Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA) (the “Retail Shops Act”) and are limited to premises:

(a) with a lettable area of 1,000 m2 or less;

(b) used for carrying on a business and that are in a retail shopping centre (a group of premises, 5 or more) or otherwise; and

As at 1 January 2013, 'specified businesses' are limited to:

(a) dry cleaning;

(b) hairdressing;

(d) shoe repair (which includes key cutting and engraving); and

(e) sale or rental of videos tapes, DVDs, electronic games and other similar amusements.

Any landlord, whose commercial premises is governed by the Retail Shops Act, is bound by significant number of obligations as to the information he/she needs to disclose to a potential lessee prior to executing the lease. In comparison landlords, whose premises is governed by the Transfer of Land Act 1893 (WA) and the Property Law Act 1969 (WA), are not bound by any specific obligations as to the information he/she needs to disclose to a potential lessee prior to executing the lease.

The Retail Shops Act did not apply to Mr and Mrs Bloggs proposed lease. Therefore, began Mr and Mrs Bloggs’ due diligence journey before executing their commercial lease.

Commercial Leases

The real estate agent provided Mr and Mrs Bloggs with two documents – the Commercial Lease with Annexures and General Terms and Conditions of the Lease. Mr and Mrs Bloggs were seeking advice as to whether both these documents captured the terms and conditions of the agreement between the landlord and them.

Typically, most real estate agents would fill in the details in a Commercial Lease template published by Real Estate Institute of Western Australia (REIWA) and provide it along with the General Terms and Conditions of Lease, also published by REIWA, to any potential lessee.

The General Terms and Conditions of Lease document sets out the obligations and liabilities of the landlord and the potential lessee, however any potential lessee must review whether the following key details have been included in Commercial Lease document provided to him/her:

(a) whether the potential lessee and the landlord have been accurately identified (is the potential lessee and/or the landlord an individual or a company);

(b) whether any guarantors have been included in the lease;

(d) whether any other items (such as equipment) owned by the landlord are being included with the lease;

(e) the term of the lease;

(f) whether the potential lessee has an option or multiple options to renew the lease;

(g) the amount of rent and the frequency of payment of rent;

(h) the mechanism and frequency of rent review;

(i) what are the types of outgoings that the potential lessee is to pay and an estimated amount per month;

(j) whether a security deposit or bank guarantee will be held and for what amount;

(k) permitted use of the premises;

(l) whether the landlord has obtained approvals for the intended use and signage from the local council and the strata management (if applicable);

(m) whether the potential lessee has been provided with copies of approvals for intended use;

(n) insurance requirements to be complied with by the potential lessee; and

(o) how the agreement can be terminated and what is the notice period.

Mr and Mrs Bloggs proposed lease document had the following inadequacies:

(a) incorrect details of the proposed lessee – Mrs Bloggs was named as a lessee in place of the potential lessee company;

(b) the landlord had not obtained any approvals from the local council and the strata management for the intended use and signage although the terms stated otherwise;

If Mr and Mrs Bloggs would have signed up a lease with the inadequacies mentioned above, they would have put themselves in a financial predicament as the incorrect person would have been bound to comply with terms of the lease without any approvals to run the business at the premises and with no estimate of the costs towards outgoings.

Takeaway Message

Caveat emptor – buyers (in this case potential lessees) beware:

The clear message for any individual or entity considering a commercial (non-retail) lease is to undertake adequate due diligence and seek independent legal advice before executing any commercial (non-retail) lease.

Please note that any information included in this article is general information only and does not constitute legal advice. Please contact us to discuss your particular circumstances.