Licence to Lend? Why lending your Building Licence is riskier than you think

Background

The practice of Registered Building Practitioners (RBPs) lending out their builder’s licences to others in return for a fee is a relatively common industry practice. (It is known as ‘licence lending’).

On the surface licence lending might appear to be an attractive arrangement: the registered builder agrees to let a third-party builder use their licence for a fee (often based on a percentage of the total build price) in order for the third-party builder to obtain warranty insurance and building permits in the name of the RBP, without having to do the work themselves. But this practice places the RBP’s licence in jeopardy and exposes the RBP to commercial and legal risk.

Legislative Requirements

In Victoria:

  1.  it is an offense to carry out major domestic work, or enter into a major domestic building contract as an unregistered builders can be fined up to $108,000.00. (This is why some unregistered builders opt to pay a ‘fee’ to a RBP for the use of their builder’s licence); and
  2. it compulsory for all builders who carry out domestic building work for more than $16,000 to obtain domestic building insurance (‘builder’s warranty insurance’) in favor of the owner. The Victorian Managed Insurance Authority (VMIA) is responsible for issuing builders warranty insurance and, amongst other things, determines the value of building works a registered builder can undertake each year. The eligibility process may result in builders being awarded insurance eligibility being ‘capped’ at a specified dollar value of works. The cap has the effect of setting a limit on the number of jobs that a builder is permitted to undertake during that period of eligibility (typically 12 month period).

The eligibility cap has prompted some registered builders who exhaust their eligibility amount to ‘borrow’ a licence from a builder who has a larger annual eligibility limit in order to undertake a job and obtain builders warranty insurance. This practice of licence lending is also a risky one.

Potential Liability for Licence Lending

If the third-party builder fails to complete the job or does so poorly (for example defects arise) the RBP is not only potentially liable for any damages sought by owners and subsequent owners but could also be liable for misleading a deceptive conduct (i.e. representing that they are the builder). Unfortunately, all too often builders who borrow a RBP’s licence often appear to discharge their role as builder poorly (possibly because they wrongly consider that they will not be liable for such works as they are not the named builder) resulting in defective and incomplete works for which the RBP is liable for.

In Theodor v Noonan [2015] VCAT 1390, the Tribunal found that there was a ‘joint venture’ between the registered builder and the third party. The registered builder, who authorized the other party to sign the building contract, had to accept responsibility for the works performed under the building contract notwithstanding he did not personally perform or direct the works.

In Hill v Bastecky [2007] VCAT 2663, the RBP who lent his builder’s licence, whilst found to be not liable in contract, was found to have acted in a misleading and deceptive manner by signing and applying for the builder’s warranty insurance and presenting as the ‘builder’ to the owners when he was not in fact the builder. As a result the RBP was personally found liable for damages suffered by the owner who relied upon the misleading and deceptive conduct. As a consequence, the owner did not have the protection afforded by builders warrant insurance and the owner could claim this loss from the RBP.

The practice of licence lending can lead not only to personal liability for damages for the RBP for actions commenced by those who suffer loss and damage (typically the owners), but also prosecution for breach of section 246 of the Building Act 1993 (Vic) (Act). Section 246 prohibits a person making false or misleading statements or providing false or misleading information to any person or body carrying out a function under the Act. A successful prosecution may result in fines, termination, suspension or the imposition of limitations on a builder’s licence. It may also prejudice the ability of the RBP to obtain builders warranty insurance in the future. The VMIA may decline to provide building warranty insurance to a RBP (and any business with whom they are involved) if they have been found to have engaged in licence lending.

Is Licence Lending Ever Legal?

A RBP’s licence can be employed in a domestic building construction business if the correct legal arrangements are entered into by the parties. In the case of Draper v Building Practitioners Board (No 2) [2017] VCAT 1402 the Tribunal considered whether Mr Simonds, the RBP of Simonds Homes Vic, was (as Mr Draper alleged) negligent, unprofessional and unethical for being the company’s RBP in circumstances in which it was alleged that he had no personal involvement in the building process. (This was due to the fact, among others, that Simonds is a volume builder who builds hundreds of houses in Victoria each year). Senior Member Riegler found that the process of:

“delegating responsibility for managing and supervising each of the many building projects undertaken by a corporate builder to district managers and site supervisors is not licence lending.”

As such, a building company may rely upon and use the licence of a RBP working within the building company if correct procedures and legal relationships are established and documented – these may involve, amongst other things, the RBP being a senior manager supervising projects undertaken by a corporate builder who engages site supervisors (under the ultimate supervision and control of the RBP).

Lending your building licence is a risky undertaking and one in which the risks will often outweigh the potential benefits. We recommend that you do not lend your builder’s licence or engage in conduct which might amount to licence lending without first obtaining adequate legal advice as to the potential commercial and legal risks.

Queries

If you have any further questions or concerns regarding the above, or if you are interested in obtaining advice on how to properly structure an agreement to use a building licence please do not hesitate to contact a member of our Building & Construction Team

Disclosure:
This article is general commentary on a topical issue and does not constitute legal advice. It references several VCAT decisions handed down in 2007, 2015 and 2017. If you are concerned about any of the topics covered in this article, we recommend that you seek legal advice.

The Author

Richard Hutchings

PARTNER, MELBOURNE