Such was how the Melbourne house which 32-year-old Hao Dong brought in March 2016 in the hope of one day housing his parents was marketed.

Along with ducted heating and a wood fire, the property included a bungalow out the back with a lounge, kitchenette and semi-ensuite. Other features included an oversized garage and workshop and a garden shed.

Several months later, the local council revealed that most of the structures on the land had been built illegally without the required permits. Dong was ordered to either get the permits or have the structures removed. A builder provided a quote of $8,500 to help him obtain permits for the structures (excluding the cost of hiring tradespeople). A demolition company quoted $7,800 to have them demolished.

This story, described recently on the ABC, is one example of a phenomenon whereby buyers of established homes enter into contracts simply to discover that previous owners have performed illegal works. These can include extensions, removing load bearing walls or constructing various structures including decks, garages, granny flats or pergolas without necessary permits from their council.

The prevalence of this should not be underestimated. Though it does not quote it’s source, Australian Property Investor magazine says illegal construction of some form is prevalent in as many as 30 percent of all Australian homes. Based on conversations with surveyors, HIA Regional Director WA John Dastlick puts the figure at one home in every four.

As well as potentially costing tens of thousands to comply with subsequent rectification orders, this could have flow on consequences. Unauthorised removal of a loadbearing wall, for instance, could cause the roof to sag. Where damage is caused by illegal construction, some insurance policies may not respond to this.

Unauthorised structures can also be dangerous. A poorly built deck, for instance, could collapse.

This raises questions about the rights of the buyers in this situation and whether or not they can legally rescind contracts.

In New South Wales, this was recently put to the test. The case concerned a three-bedroom apartment in the Sydney suburb of Ryde which Kai ‘Kevin’ Huang and his wife Zuyi Chen purchased on August 26, 2016 for $900,000 including a $90,000 deposit. Unbeknown to them at the time, the dwelling had previously been constructed in 2012 according to an approval which was afforded on the basis of two bedrooms. Without approval, the previous owners had erected an internal wall on the northern side of the ‘media room’ which enclosed that room and effectively created a third bedroom. Despite being marketed and sold as a three-bedroom unit, the dwelling was thus in fact approved only for two bedrooms.

Between the time of signing the contract and property settlement, Hwang and Chen discovered this. On September 26 of that year, their solicitors served notice of the intention to rescind the contract on the basis that the third wall which had been constructed was in fact illegal. Vendor Pelin Ceylan did not accept this and served notice on Hwang and Chen to complete the transaction. Subsequently, Ceylan gave formal notice of termination of the contract and forfeited the deposit.

In the Supreme Court, Judge Parker J found in favour of the buyers. Under Section 52 of the Conveyancing Act 1919 (or, more specifically, under regulations which are given legal effect by virtue of that section), vendors in NSW are deemed to warrant that there is no matter in relation to the building or land which is sold that would justify any authority making a demolition order. Given that the alteration was a non-compliant development, Parker J found that it would be open to the Council to make an order requiring the wall to be removed. Accordingly, there there had been a breach of statutory warranty and the purchasers were thus within their rights to rescind the contract and have their deposit refunded.

So where do buyers stand?

According to Rebecca Castley a partner in the property team at Colin Biggers and Paisley Lawyers, the question of whether or not buyers can rescind the contract where illegal works have taken place depends upon any express or implied warranties which they are given along with any applicable terms or conditions of the contract.

In NSW, as demonstrated in the Hwang case, buyers have an implied warranty under the Conveyancing Act that there would be no undisclosed matter in relation to structures on the land which would justify any form of demolition order. Thus buyers in circumstances similar to those faced by Hwang are generally able to rescind the contract and have their deposits refunded.

The situation would be different, Castley said, in her home state of Queensland. There, conveyancing legislation does not provide for any warranties on the part of the vendor with respect to the lawfulness or otherwise of the structures on the property. Nor is such a warranty provided for in the standard form of contract provided for by the Real Estate Institute of Queensland.

Accordingly, the only way in which purchasers would enjoy any protection against this sort of thing is to arrange for it themselves within the purchase/sale agreement.

This could take one of two forms.

First, the contract could include provisions which make the sale subject to the buyer being able to satisfy themselves that all relevant approvals for all structures or works on the property were in place.

Alternatively, the protection could take the form of a warranty under which the seller guarantees that all necessary approvals in respect of renovations, extensions or modifications have in fact been obtained and that all final inspections in respect of these approvals have been duly carried out. Where the seller breached this warranty, the contract should afford the purchaser specified rights. Ideally, this should include rescission of contract and refund of deposit.

In terms of strategies, Castley says buyers should adopt several steps to protect themselves.

Prior to entering into contracts, they could ask the seller for evidence of approvals for any renovations, alterations or improvements which have been made.

Next, they should consult with their municipal building surveyor, who can visit the property and identify where alterations and extensions have taken place.

Beyond that, they should ensure that there are suitable provisions within the sale contract so as to ensure their protection. As described above, this would occur either by the sale being conditional on the buyer being able to satisfy themselves that all relevant approvals for renovations and extensions are in place or via a warranty given by the vendors which guarantees that all such approvals are in place.

As well, Castley says buyers may consider title insurance, which provides cover if illegal structures are later discovered on the property. This obviously falls outside the terms and conditions of the contract and those remedies which are available against the seller. It involves the buyer having to pay the upfront premium and meeting the conditions of the title insurer.

As a final point, the importance of specific wording should be noted.

In the NSW case of Ebadeh-Ahvazi v Namrod in 2017, the buyer entered into a contract to buy land in the Sydney suburb of Fairfield for $1.46 million including a $146,000 deposit. As part of this, the seller had agreed to reinstate the property to its previous condition prior to what the council had deemed to be illegal earthworks. This was to happen prior to ‘completion’, with the buyer being given the right to terminate the contract if this did not happen. The ‘completion date’ was June 20, 2015.

By the time June 20 rolled around, the reinstatement had not been completed. Nor was it completed by an extended date of July 29 that year. The buyer sought to terminate the contract and obtain a refund of the deposit.

The seller refused and approached the buyer to complete the contract months later after the reinstatement had been completed. When the buyer failed to comply with a notice to complete, the seller terminated the contract and declared that the buyer had forfeited his right to the deposit.

In this case, the Supreme Court found against the buyer. This was largely because of the distinction between the concept of ‘completion’ and ‘completion date’. The seller, it said was only required to satisfy his obligation to complete the works by ‘completion’ – which meant the date on which the seller could be made to complete the contract and had no reference to the ‘completion date’. Thus the seller had not violated the special condition of his contract simply because the ‘completion date’ passed before he was able to complete the works.

Cases such as this illustrate the need for purchasers to ensure that the wording of any provisions or clauses surrounding illegal works are correct and should seek professional advice to ensure that this happens.

Around Australia, purchasers of residential property can encounter problems with illegal building works.

With a few precautions, buyers can protect themselves.