Home Building Contract(s) – Can they be mutually terminated?

The Housing Industry Association (HIA) being the official body of the home building industry in Australia assists its members in developing contracts for residential construction industry. The contracts have been prepared and amended from time to time to comply with the legislations and regulations that apply to the home building industry in each State.

 The contracts set out in rights and obligations of the builder and the homeowner, including timeframes by when each party is to fulfil his/her/its obligations and circumstances when one party to the contract is entitled to terminate the contract for non-fulfilment of the obligations by the other party to the contract.

A few weeks ago, a couple visited my office and instructed me that nearly seven (7) months ago they executed a Lump Sum Building Contract (the Contract) with a builder to construct a house on a block of land they own. The Contract provided that the builder was to prepare the building plans and seek the local council’s approval within two (2) months and complete construction of the house within eighteen (18) months from the date of execution of the Contract. The couple paid an initial deposit sum to the builder to progress with preparation of the building plan.

Since execution of the Contract, the building plans were required to be amended twice due to changes in the local council requirements such that the building plans were not submitted to the local council for its approval. Both the builder and the homeowners discussed various options available to them, which included but were not limited to extending the time to complete the construction of the house. The homeowners’ instructed me during the last seven (7) months their circumstances have significantly changed, and they were not in a position to await for a further period of time for the builder to complete construction of the house.

The homeowners sought my advice as to whether or not the builder and they could negotiate to mutually terminate the Contract to the effect that the parties’ respective responsibilities and obligations under the Contract will come to an end. I advised the homeowners that both parties to a home building contract are entitled to mutually terminate it by executing a deed of mutual termination. In general, a deed of mutual termination is to be prepared when:

(a)         both parties agree to end the contract and there is still something required to be completed under the contract such as payment, or rectification of defects; or

(b)         the parties do not want to initiate any action(s) pursuant to any clause in the building contract, which may ordinarily arise as a result of termination, for example the deed may allow the parties to avoid issuing breach notices and termination which may lead to claims for costs and damages by one party; or

(c)         the contract does not provide a right to terminate.

Subsequent to negotiations between the homeowners and the builder, both parties agreed to mutually terminate the Contract with the homeowners compensating the builder towards the administrative costs, disbursements and other expenses incurred by the builder until the date of execution of the deed.

The homeowners instructed me to prepare the deed of mutual termination of the Contract incorporating the mutual agreement between the builder and them. The builder reviewed and sought independent legal advice on the proposed deed of settlement and both parties executed the deed

The key terms and conditions in a deed of settlement and release between the homeowners and the builder to mutually terminate a home building contract, may include but may not limited to:

(a)         Background details;

(b)         Settlement terms between the parties – the sum of money to be paid or any other action(s) to be taken in full and final settlement of termination of the building contract, the date and method of payment and what happens in the event of non-payment of the settlement sum or a breach of terms of the deed;

(c)         Release and waiver – parties release one another from any claims relating to the building contract and waive their respective rights to demand performance of any outstanding obligations or claim damages;

(d)         Bar to action – both parties are prevented from bringing any further action, claim or demands against each other in relation to the terminated contract;

(e)         Mutual disparagement – a clause that prevents either party from damaging the other’s reputation;

(f)          Confidentiality – a clause requiring both parties to keep the terms of the deed and all associated details relating to the deed confidential.

Parties to a home building contract may negotiate and attempt to mutually terminate a home building contract without engaging in an expensive and arduous litigious action.

Please note that any information included in this article is general information only and does not constitute legal advice. Please contact us to discuss your particular circumstances.