A preliminary agreement is generally a contract for works undertaken by a builder prior to a commencement of construction and are often used in circumstances where the land, subject to the construction, has not been registered or purchased by the owner due to the fact the subdivision works have not been completed.
Preliminary work generally includes services such as:
- Preparation of plans and designs for the building work;
- Demolition work;
- Site inspections for the purposes of conducting surveys or obtaining measurements for the plans; and
- Applications to the appropriate authorities for approval or certification.
In providing these services, the builder may incur considerable costs prior to works under a building contract being commenced.
There are various ways that builders attempt to obtain payments for these services prior to construction and some of them may lead to the builder being in breach of the Home Building Act 1989 (Act) in the way building contracts are formatted or compiled, or because payment is made before a HBCF certificate of insurance is provided.
Section 92 of the Act provides that no payment can be received or demanded under a residential building contract unless a HBCF certificate of insurance is provided for the work. If payment is made and no certificate is provided, the owner may succeed in a claim for refund of the payment and a builder may be fined or penalised by Fair Trading.
While preliminary works are not considered residential building work for the purposes of section 92, they may be if they are included in a contract for residential building work or the preliminary agreement is part or associated with the contract.
It is recommended therefore that a preliminary agreement be a separate agreement and not part of the building contract. Even where separate, payment should not be associated with the building contract as a deposit or percentage of the building contract to be deducted from the contract price in the future.
It was found in the matter of Syed Ahmad Shraib Aly Pty Ltd V Jandson Pty Ltd  NSWCATAP 228 in September 2018, that where the preliminary work is included as a necessary integral part or a result of the construction of a dwelling as set out in the contract, such work is connected by participation or association with that dwelling by the terms of the contract between the owner and the builder.
Hence, the importance of a separate contract and a clear difference between the execution of a building contract and a preliminary agreement. If, however a HBCF certificate is provided or if no money is demanded or received until it is provided, the agreements can be jointly executed. It would be prudent however to get advice on this format to ensure it complies with the Act.
The HIA information sheet (NFSCON 1241, current at December 2018) recommends what not to do under preliminary agreement as:
- Ensure the scope of works does not cover any residential building work as defined under the Act;
- Ensure the amount you claim under the preliminary agreement is relevant only to the preliminary works and not expressed as a percentage of the future residential contract or has an initial deposit or a credit for the later residential building contract;
- Keep your preliminary agreements separate from your residential building contract; and
- Do not execute the preliminary agreement at the same time as the residential building contract.
The contractual arrangements in these circumstances can vary according to the circumstances, however it is recommended that advice be obtained as to the arrangements in order to limit future risk. As a penalty for failing to comply with the Act may impact your licence conditions or your HBCF eligibility.
This is a complex area of law so please contact Kelvin Keane if you require further information or advice on this issue.
Group Principal, Nexus Law Group
+612 9016 0141
This publication is © Nexus Law Group and is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.