I’ll have a salon at the front and apartments at the back – mixed use development and the SOP Act

In its decision in Piastrino v Seascape Constructions Pty Ltd [2022] VSC 202, the Supreme Court of Victoria held that section 7(2)(b) of the Building and Construction Industry Security of Payment Act 2002 (Vic) (the SOP Act) did not exempt the building contract for a mixed-use development from application of the SOP Act. In doing so, the Court examined the circumstances in which a building contract for a mixed-use development could be a “domestic building contract” for the carrying out of “domestic building work” where the building owner is “in the business of building residences”.

Background

In October 2017, Mr and Mrs Piastrino (the Piastrinos) entered into a building contract (the Contract) with Seascape Constructions Pty Ltd (Seascape) for a mixed-use development comprising the construction of four apartments, modification of an existing hair salon and the installation of a car stacker (the works) at their property in Albert Park, Victoria (the property).

The contract price for the works was approximately $1.7 million. The Contract did not distinguish between the domestic building work (within the meaning of s 3(1) of the Domestic Building Contracts Act 1995 (the DBC Act)) and other work which formed part of the works (discussed further below).

In May 2021, Seascape issued a payment claim to the Piastrinos for approximately $240,000, endorsed under the SOP Act.  In response, the Piastrinos gave a payment schedule in which they denied liability for the payment claim.

Seascape made an adjudication application under the SOP Act in respect of its payment claim, that the adjudicator determined in its favour by awarding the total amount claimed in the payment claim plus costs (the adjudication determination).

The Piastrinos sought judicial review of the adjudication determination, submitting that section 7(2)(b) of the SOP Act exempted the Contract from the application of the SOP Act, so the adjudication determination was made without jurisdiction and should be quashed.

Section 7(2)(b) of the SOP Act

Section 7(2)(b) of the SOP Act provides that the SOP Act does not apply to:

• a construction contract which is a “domestic building contract” within the meaning of the DBC Act;
• entered into by a “builder” and “building owner” within the meaning of the DBC Act;
• for the carrying out of “domestic building work” within the meaning of the DBC Act,

but not where:

• the building owner is “in the business of building residences and the contract is entered into in the course of, or in connection with, that business…” (emphasis added).

For avoidance of confusion, the whole of section 7(2)(b) is referred to here as the “exemption”, and the final limb carve out (which serves to apply the SoP Act) as the “exception”.

Decision of the Supreme Court of Victoria

The Court identified three questions for determination:

1. whether section 7(2)(b) of the SOP Act has application to mixed-use developments such as that the subject of the Contract;
2. if section 7(2)(b) of the SOP Act has application, then were the Piastrinos in the business of building residences; and
3. if the Piastrinos were in the business of building residences, then did they enter into the Contract in the course of, or in connection with, that business?

The Court found that the exemption in section 7(2)(b) of the SOP Act could have application to mixed-used developments that include domestic building work. However the Court found that by entering into the Contract, the Piastrinos had embarked upon and were thereafter engaged in the business of building residences, triggering the exception to the exemption, meaning that the SOP Act applied to the Contract.

The first question

In reaching its determination of the first question, the Court observed that there were two relevant “gateways” by which a mixed-use development incorporating domestic and other (non-domestic) work, could constitute “domestic building work” within the meaning of the DBC Act and thus qualify for the exemption in section 7(2)(b) of the SOP Act.

These available “gateways” to “domestic building work” are:

• section 5(1)(e) of the DBC Act – the construction of a building and associated work, where the building is constructed on land zoned for residential purposes for which a building permit is required; and
• section 5(1)(a) of the DBC Act – the erection or construction of a home including any associated work (irrespective of the zone which applies to the subject land).

The Court found that due to the zoning which applied to the property, the first gateway was not open, but the second was, as the Contract was for the construction or erection of a “home” (the four apartments) and “associated works” (the car stacker) within the meaning of the DBC Act. In reaching this conclusion, the Court undertook a detailed examination of the authorities that have considered what work constitutes domestic building work.

The Court also found that although the part of the works which included modification to the existing hair salon were intended to be used only for business purposes, section 6 of the DBC Act did not operate to exclude the work from the definition of “domestic building work” under the DBC Act.  In reaching this conclusion the Court observed that where a building contract provides for both domestic building work and other work but fails to separately identify that work as is required by section 12 of the DBC Act, it is necessary to determine the “dominant character” of the work the subject of the contract. The Court concluded that the dominant character of the work was “domestic building work” and that therefore, the Contract was a “domestic building contract” within the meaning of the DBC Act. This in turn meant the whole of the works fell within the first limbs of the exemption in section 7(2)(b) of the SOP Act.

The second and third questions

In reaching its determination of the second question, the Court undertook a detailed examination of the authorities which have considered the expression “in the business of building residences” in section 7(2)(b) of the SOP Act and similar expressions in other legislation. The Court concluded that although the Piastrinos were not in the business of building residences prior to their entry into the Contract, they became so by their entry into the Contract. In reaching this conclusion, the Court took into consideration several factors, including (without being exhaustive) the commercial scale and nature of the project to redevelop the property and the Piastrinos’ intention to rent out the apartments and hold them as an investment.

In circumstances where their entry into the Contract caused the Piastrinos to be “in the business of building residences” it was unnecessary for the Court to give separate consideration to the third question.

Impact of the decision

The decision in Piastrino v Seascape provides a clear authority on the application of the exemption in section 7(2)(b) of the SOP Act in the context of mixed-use developments involving some domestic building work. For property owners, the decision highlights that the exemption in section 7(2)(b) of the SOP Act is only partial in that it will not apply if they are found to fall within the exception of “in the business of building residences and the contract is entered into in the course of, or in connection with, that business” which appears an increasingly low bar. For builders, the decision serves as a reminder of the risk of failing to comply with section 12 of the DBC Act, by identifying separately any domestic building work and other work the subject of the contract. A builder’s failure to do so may increase the risk that the court will determine that the “dominant character” of the subject work is domestic building work and therefore subject to the exemption in section 7(2)(b) of the SOP Act.

If you have any questions in relation to this case, please don’t hesitate to contact a member of our Construction & Engineering team.

Want articles on construction & engineering delivered straight to your inbox? Click here to subscribe.