Lawyers beware! How a failure to advise on an uninhabitable granny flat left a conveyancing lawyer $76,000 out of pocket
The NSW District Court has awarded $100k in damages to a first-home buyer after its finding that her solicitor and the real estate agent involved failed to appropriately advise her on the habitability of a granny flat.
- Whether a real estate agent engaged in misleading and deceptive conduct, unconscionable conduct and/or was negligent in the sale of a property, which it knew was the subject of a council prohibition notice; and
- Whether a conveyancing lawyer advising the purchaser was negligent in its failure to advise on the special conditions contained in the contract for sale.
On the 26 May 2019 the Plaintiff purchased a residential investment property in Toongabbie, NSW (Property). The Property was comprised of a main house (Main House) and a granny flat (Granny Flat), which had originally been built and used as a garage.
The contract for sale of the Property (Contract), which was provided by the vendor to the real estate agent, included a notice from Blacktown City Council (Council) dated 21 August 2013 (Council Notice), which read:
“The garage is not permitted for habitable uses as the slab floor level has insufficient freeboard protection against flooding.”
The Property was advertised as being a house and granny flat, and referred to as a “fantastic opportunity for an astute investor to secure [a] dual income property investment”. That is, both the Main House and Granny Flat were advertised as being potential sources of rental income, despite the prohibition contained in the Council Notice.
About a week before purchasing the Property, the Plaintiff received a full copy of the Contract (including the Council Notice) and inspected the Property with the First Defendant. There she observed that both the Main House and Granny Flat were occupied (though it was clear to her that the Granny Flat had once been a garage).
Soon after, without having obtained legal advice, the Plaintiff purchased the Property. However, during the exchange phase of the purchase, the Plaintiff retained the services of a lawyer to provide advice on the Contract. Following completion of the purchase, and after a number of months which involved a number of changes to the tenants living on the Property, the Plaintiff received a $1,500 fine from the Council in relation to the Granny Flat (for development without development consent).
The decision at trial
Against the Real Estate Agent
Against the Agent the Plaintiff brought three claims; 1) misleading or deceptive conduct, 2) unconscionable conduct, and 3) negligence. In respect of the first two claims (misleading or deceptive conduct and unconscionably conduct) the Plaintiff argued that because the Agent became aware of the Council Notice, yet continued to represent that the Granny Flat was suitable for living purposes and a potential source of rental income, it had engaged in misleading and unconscionable conduct.
With respect to the claim in negligence, the Plaintiff argued that the Agent was under a duty of care in making representations to her about the Granny Flat, and failed to take reasonable precautions to avoid the risk of her suffering loss in the event the Granny Flat was not approved as habitable.
Against the Lawyer
Against the Lawyer the Plaintiff brought a claim in professional negligence, arguing that as her lawyer he owed her a duty of care to make inquiries with the Council as to the status of the Granny Flat, and to advise on its habitability as well as the contents of the Contract and how that related to the Plaintiff’s ability to lease the Granny Flat.
Against the Agent, the Court held that the misleading and deceptive conduct claim had been made out. In selling the Property, the Agent had made representations about the habitability of the Granny Flat that were ultimately misleading in light of its knowledge of the Council Notice.
The Court also held that the professional negligence claim against the Lawyer had been made out. Significantly, the Court opined that an important part of the Lawyer’s duty of care was “to read and consider the contract for sale that his client had executed, identify features within the contract that were unusual or inimical to the purposes of his client’s acquisition of the property and which might be detrimental to her interests and to provide advice.”1
As such, the Court awarded the Plaintiff approximately $100,000 in damages, and apportioned liability 25% to the Agent and 75% to the Lawyer. Further, the Plaintiff’s damages included a reduction of 15% due to the Plaintiff’s contributory negligence in failing to seek legal advice prior to purchasing the property (particularly noting that she was a first home buyer).
Implications for you
This case is a good reminder of the duty of lawyers in a conveyancing context to consider their client’s circumstances and to advise upon all the features of a contract, particularly any unusual or special conditions.
1 Kumar v Sydney Western Realty Pty Ltd & Anor (No. 2)  NSWDC 446 at .