When Jed Clampettt buys next door….
- 12 months ago – Seller lists his vacant block with you. Once he signs up he hands you the forest of pages of stuff he thinks is pertinent. You know most of it’s not, but you’re polite.
- 10 months ago – You finally get that block away. Settlement is smooth and the buyers invite you for a quick glass of bubbles, and show you their plans for the ‘dream home’. Blood drains from your face as you recall the early discussion with your seller when he handed you the ream of paper muttering something about stupid building guidelines.
- 3 months ago – the liveable shed (aka “shouse”) is finished (amazing it took that long really).
- One week after that – your seller receives a notice from the developer’s lawyer of its intention to claim $25,000 in liquidated damages as was agreed in the original contract. He emails it to you and his lawyer chasing ‘input please’.
- One day ago – your seller’s lawyer is on the phone, that really nice but tenacious one from PD Law. Says her client told you about the building covenants. She wants to have a quick word if that’s ok.
- Right now – mouth dry, you’re dialling the seller’s mobile.
What are building covenants?
Design guidelines, architectural codes, building covenants. There are loads of names but they generally mean the same thing: the developer of a residential estate drew up some prescriptive rules about minimum building standards with the intent that all dwellings built in that estate meet a certain minimum standard. We’ll call them building covenants here.
When are they binding?
In the original contract between developer and a first buyer, the first buyer must comply with the building covenants because it’s a binding contract (as long as those conditions are themselves lawful!). However if the first buyer sells the block without having built on it to a second buyer (Jed), and doesn’t ensure in the contract that Jed’s bound by those building covenants, Jed’s good to go on the shouse, and so on down the line as the block is sold over and over. Once the contractual ‘chain’ is broken, subsequent owners are free to build what they like as long as they comply with relevant statutory building codes.
To provide themselves with a bit more coverage, developers make sure they’re indemnified by the first buyer for any loss suffered down the line because of the Jed effect. Sometimes developers add another stinger which states that an agreed cash payment represents the loss the developer faces for any breach down the line. Although these penalty amounts can themselves be a bit tricky to enforce, it’s better to avoid the issue in the first place.
Only consider this in the context of freehold vacant land. Things are a little different in a community title context, where other guidelines and covenants can in some circumstances be embedded within a community management statement.