Can a home buyer claim
compensation for a water leak after settlement?
If a home buyer notices water stains appearing on the
ceiling when it rains, soon after they settle and move in,
do they have any rights to claim compensation from the
According to the recent decision of the Supreme Court of
New South Wales in Stevenson v Ashton  NSWSC
1689 (Harrison AsJ), the vendor might be liable to pay
compensation, if the water leak was caused by defective
building work done within the previous six years, even after
settlement has taken place.
The Law – Defective
The statutory defects warranty
Under the Home Building Act 1989 (NSW) (the
‘Act’), the builder warrants to the owner that the work is
done with due care and skill (s 18B(1)(a)) and that
the work will comply with the law (such as the
Building Code of Australia) (s 18B(1)(c)).
Building defects are breaches of the warranty.
There are two kinds of building defects: a major
defect where the warranty period is 6 years, and
other defects where the warranty period is 2 years (s
18E(1)(b)) from the date of completion of the work (s
What is a major defect?
The definition of major defect was limited to a
structural defect until 2015, when it was redefined to
be a defect in a major element of a building, namely:
- an internal or external load-bearing component of a
building that is essential to the stability of the
building, or any part of it (including but not limited
to foundations and footings, floors, walls, roofs,
columns and beams), or
- a fire safety system, or
- waterproofing, or
- External cladding which causes or is likely to cause
a threat to the safety of any occupants of the building
if a fire occurs in the building (s 18E(4))
Of these elements, waterproofing is a common
defect. Schedule 4 of the Home Building Regulation 2014
(NSW) makes it clear that it applies to both water entry
and water seepage:
waterproofing is protective treatment designed to
prevent the penetration of water or moisture into
the dwelling or to wet areas in a dwelling
designed to prevent the unwanted escape of water
from those areas by using solid membranes or
membranes applied by brush, roller or any other method.
Why is the former owner liable?
The successor in title to an owner-builder, a holder of a
contractor licence, a former holder or a developer who has
done residential building work is entitled to the benefit of
the statutory warranties as if they had contracted with the
buyer to do the work. (s 18C & 18D)
The case of Stevenson v Ashton
One month after settlement and moving into a renovated
late 19th century terrace house in Darlinghurst, Stevenson
noticed water staining at two points in the ceiling in the
ground floor living room during heavy rain.
The expert identified the cause as being the defective
construction of the external balcony (which was tiled) on
the first floor:
“the build-up of water enters the bedroom floor
because there is no step at the door sills, the membrane
is possibly leaking at the junction of the parapet walls
because there is no upturn or flashing and there is no
provision of an overflow spitter pipe through the
The expert’s opinion was that in each respect, the
construction of the balcony did not comply with the
Australian standard AS4654.2-2009.
The expert concluded that:
“If water penetration is allowed to continue without
rectification of the balcony it will eventually be
destructive of the plasterboard sheets in the ceiling
below and it will eventually cause the joists and
timber, structural joists and ceilings in the ceiling
below to get wet which will set up conditions for rot
and fungal decay.”
Similar observations and conclusions applied to the
cladding on the exterior of the attic and the bedroom at the
rear which was not installed according to the manufacturer’s
The building work was done subject to Development Consent
from the Council for extensive extensions to the rear living
room and kitchen, to the first floor and to the attic. The
work was complete in May 2014, which was 2 years before the
purchaser completed the purchase in May 2016. The work was
managed by Ashton who held an owner-builder permit.
The findings and rulings on the law
Stevenson instituted proceedings against Ashton in the
Civil and Administrative Tribunal of New South Wales (NCAT)
in November 2016, which was more than 2 years after the work
was complete. As a result, unless there was a major
defect, the right to claim compensation was no longer
The Tribunal found that work to the balcony and the
cladding was defective. It was satisfied that:
- The defect was a major defect, that is,
- The defect was attributable to defective design or
defective or faulty workmanship; and
- The defective waterproofing has caused water
penetration into building cavities which was likely to
cause the threat of collapse of the building or part of
the building. (s 18E(4)(a))
The Tribunal awarded $10,987.68 for the cost of
rectification of the balcony and $31,330.09 for the cost of
rectification of the cladding.
The Tribunal rejected claims for the roofing and
guttering. The defects were: the roof sheets had unsealed
lap joints, the gutters overflowed back towards the
building, and the roof flashing joints overlap was
The Tribunal held that these defects did not satisfy the
major defect requirement that: “the likely
consequence of a failure to repair the roofing defects will
be that any part of the building will become uninhabitable,
be destroyed, or collapse” because there was no evidence of
water penetration. Because they were not a major defect,
the 2 year limitation period to make claims had expired. See
Stevenson v Ashton  NSWCATCD 25
The Appeal Panel of the Tribunal took a more narrow
view than the Tribunal stating that the “consequences of
the defect must be shown to have, or to probably have, a
proven consequence for the habitation, or use, of the
building, or to the integrity of the building”.
It found that that the expert’s evidence on future damage
from water penetration amounted to no more than speculation
or assumption. It noted that the cladding had been in place
4 years without water damage. It ruled that there was
insufficient evidence to find that defects will cause or be
likely to cause the building to become uninhabitable, be
destroyed or collapse as required by s 18E(4).
For this reason, the Appeal Panel reversed the Tribunal’s
decision, found that the balcony and cladding defects were
not a major defect and denied the claim for compensation.
See Ashton v Stevenson; Stevenson v Ashton 
On appeal, the Supreme Court found that the Appeal
Tribunal “placed too great an emphasis on the present
manifestation of the consequences under s 18E(4)(a)(i) to
(iii), despite the legislation also permitting defects which
are “likely to cause” those consequences to be major
Accordingly, the Court found that the Appeal Panel was in
error to find that the defects were not major defects. For
the balcony, it was wrong to require “that the relevant
consequences are presently manifested”, because the s
18E(4)(a) definition includes “likely to cause”. For the
cladding, it was open to the Tribunal to accept expert
evidence: “that the defects would inevitably in time lead to
moisture penetration in the building”.
The Court ordered that the matter be remitted to NCAT for
determination according to law.
Does caveat emptor apply?
In conveyancing law and practice, the maxim caveat
emptor means that a purchaser has no right to complain
about building defects once they enter into an unconditional
Contract for Sale of the land. Commonly, the Contract
contains a clause to this effect.
A purchaser must therefore do due diligence by obtaining
Building and Pest Inspection Reports before they enter into
a Contract or before the Cooling Off period expires.
Under the statutory defects warranty, a purchaser of a
new house or strata villa or home unit (less than 4 storeys)
can claim the cost of repairing building defects from the
vendor who had the new home, villa or unit built (s 18D(1)),
provided they make the claim within 6 years for a major
defect and 2 years for other defects.
The statutory defects warranty represents a major
exception to the maxim caveat emptor because it
cannot be excluded (s 18G). It is therefore available to a
purchaser after settlement of the purchase.
This statutory defects warranty may not be available if
the purchaser purchased “in full knowledge of the defects”
at a price which reflected the existence of the defects,
according to Allianz v Waterbrook  NSWCA 224
(per Ipp JA at 110- 116).
In Stevenson v Ashton the Tribunal had no evidence to
infer that Stevenson had ““full knowledge” of both the
nature of the defects and the work required to rectify
What is a major defect?
The case of Stevenson v Ashton is the first time the NSW
Supreme Court has had to consider the definition of the term
major defect, which replaced the former term
structural defect on 15 January 2015.
The express inclusion of waterproofing as a major defect
is a major advance for all home owners because it allows 6
years for a claim to be made from the date the work was
The Supreme Court’s ruling that it is only necessary to
prove it will likely cause, not actually has caused the
building to become uninhabitable, be destroyed or collapse,
has widened the scope of possible claims.
The case of Stevenson v Ashton has made claims for
defective balcony construction or external cladding which
cause water ingress feasible. Claims for defective roofing,
guttering and roof flashings are not feasible without strong
evidence that the water ingress has penetrated into building
cavities and is likely to be destructive to the building.