Property developers: Have you registered as a home builder?

Property developers should not be lulled into a false sense of security when subcontracting with construction companies that are registered as home builders in terms of the Housing Consumers Protection Measures Act, No. 95 of 1998 (Housing Protection Act). As clarified in the Constitutional Court's recent finding in the case of Cool Ideas 1186 CC v Hubbard and Another 2014 (4) SA 474 (CC) (Cool Ideas v Hubbard), both property developers and the construction companies with whom they subcontract, have to be duly registered as home builders in terms of the Housing Protection Act, prior to the commencement of construction.

In the case of Cool Ideas v Hubbard, a property developer entered into a building contract with a housing consumer and subcontracted the services of a building contractor to undertake the construction of the housing consumer's home. The housing consumer took issue with the quality of the work and refused to make final payment in terms of the agreement. Following this refusal, the housing consumer instituted arbitration proceedings, claiming the costs of remedial works; and the property developer counter-claimed for the balance of the contract price. It transpired that although the building contractor was registered as a home builder in terms of the Housing Protection Act, the property developer was not registered as such at the time of entering into the building contract nor at the commencement of construction. The question consequently arose as to whether s10(1) of the Housing Protection Act required a property developer to register as a home builder prior to the commencement of construction or whether registration before payment was sought would suffice.

Section 10(1) of the Housing Protection Act provides that:

"No person shall –

(a) carry on the business of a home builder; or

(b) receive any consideration in terms of any agreement with a housing consumer in respect of the sale or construction of a home, unless that person is a registered home builder."

The Constitutional Court held that a purposive reading of the Housing Protection Act, which is aimed at protecting housing consumers, requires both the property developer and the building contractor to be registered as home builders before commencing building works. The statute does not permit the registration of a home builder after-the-fact. Failure to register as a home builder prior to the commencement of building results in the property developer being ineligible to claim consideration for work done in terms of a building contract.

The property developer argued that the prohibition on the receipt of consideration due, in terms of the building contract, amounted to an unconstitutional deprivation of the property developer's property. The Constitutional Court, however, held that the deprivation of the property developer's property did not violate s25 of the Constitution. Section 10(1)(b) is aimed at achieving a legitimate and important statutory purpose with a rational connection between the statutory prohibition and its purpose. There is accordingly no arbitrariness in the deprivation and thus no violation of s25 of the Constitution.

The Constitutional Court also confirmed that the prohibitions set out in s10(1) and (2) of the Housing Protection Act are not directed at the validity of building contracts, but at the unregistered home builder who is barred from receiving any consideration for the work done in terms of that agreement. The building contract is thus not invalidated by the breach of the statutory prohibition contained in s10 of the Housing Protection Act.

In light of the above, it is essential that property developers register as home builders prior to the commencement of construction, even if they have subcontracted to a building contractor that is duly registered. Failure to do so will result in the property developer being barred from claiming consideration for the services rendered in terms of the building contract.