Time and Building Reforms may affect Owners and Owners Corporations: Why Owners Need to Consider Action Now!
The Home Building Amendment Act 2014 (“the Act”) passed by the NSW Government will change the residential defect claim and contracting landscape. In typical fashion, it will apply retrospectively in part, stripping valuable rights from owners corporations and lot owners.
The Act will commence on a day to be appointed by proclamation, which is expected to be on or before 1 December 2014.
To attempt to preserve existing valuable rights owners corporations should consider the following urgent steps before the amendments commence:
- Commence proceedings for breach of statutory warranty to preserve the existing 6 year statutory warranty rights for building defect claims and to avoid the principle of a work order as opposed to damages being awarded;
- Lodge any home warranty insurance claims where a builder has become insolvent, died or disappeared to preserve existing rights under the policy of insurance;
- Give consideration to entering into any rectification building work contracts being negotiated with a builder as a priority;
- Check that independent experts such as architects, surveyors and engineers have professional indemnity insurance and that the terms of their engagement do not unreasonably limit their liability; and
- Make a home warranty insurance claim if the builder has “disappeared” interstate, because the new definition of “disappeared” will mean that a builder has to have “disappeared” from Australia. The amendment will not affect home warranty insurance claims that are made prior to the legislative amendment being proclaimed.
The reasons why owners corporations should take the above steps are as follows:
- To preserve existing rights – as the sweeping changes proposed will result in the 6 year warranty periods for many defects being reduced to 2 years.
- Home warranty insurance policies issued on or after 1 July 2002 will be amended retrospectively under the Act in circumstances where the ‘structural defects’ liability will be replaced with the ‘major defects’ liability set out in the Act, which will have the effect of significantly reducing the liability for the home warranty insurers (both private insurers and the government home warranty insurer, SICorp).
- Under the proposed changes the existing entitlement to claim for “Structural Defects” within 6 years is abandoned and instead such defects must be a “Major Defect” in a “Major Element” which is so severe as to cause the building or part of it not to be able to be used, to be destroyed or for there to be a threat of collapse.
The stated elements of increased consumer protection explained in Minister Ayres’ Second Reading Speech, who is running with Minster Roberts reform in relation to the Act, have not been achieved. Instead a substantial retrospective reduction in the right to claim will result with many 6 year rights for defects being reduced to a mere 2 year period to claim.
If an owners corporation is currently negotiating rectification work contracts with a builder, consideration should be given to entering into the contract as a priority to avoid the effect of the following that will be imposed under the Act:
- Builders and Subcontractors will have a defence to any breach of a statutory warranty claim where the builder or subcontractor has relied upon advice from an owner’s independent expert as defined in the Act. This defence is not available for any contract entered into before the legislative amendment is passed. It will therefore be imperative that owners corporations ensure that all experts engaged have an appropriate level of professional indemnity insurance with appropriate limitation of liability clauses.
- Owners corporations will have a duty to notify builders and subcontractors within 6 months of a breach of a statutory warranty under any contract that is entered into after the legislative amendment is proclaimed. Where a notification is not made within time a court or tribunal may reduce any compensation awarded to an owners corporation and a home warranty insurer also may reduce its liability.
- Owners corporations will have to enforce statutory warranties against builders and sub-contractors to avoid the home warranty insurer being able to reduce its liability. This and the above point will prove difficult absent knowledge of the relevant sub-contractor.
- Stand alone contracts for internal painting work, concrete tennis courts and water features will be excluded from the definition of residential building works and will therefore not be protected by the home warranty insurance provisions and statutory warranties in the legislation. Accordingly, if any rectification works are to take place on a “stand alone” basis for any of these works, where possible, steps should be taken to enter into those contracts as a priority before the legislative amendment is proclaimed.
In addition to the proposed amendments outlined above there are several other key amendments that will affect owners corporations, some of which are outlined below.
- The completion date for new buildings in a strata scheme will occur when an occupation certificate is issued for the whole building, unless proceedings have already commenced. For the purposes of home warranty insurance, however, this is limited to policies issued by SICorp from 1 July 2010.
- Contracts for building works must include a termination clause allowing for termination of the contract as provided by the general law. Additional termination rights can be negotiated.
- There are new provisions concerning progress payment schedules and the issue of progress payment claims, however, the effect of those provisions is excluded where owners corporations contract for remedial works.
- The Act formally recognises the common law duty to mitigate loss. A court or tribunal may reduce any compensation awarded should an owners corporation fail to mitigate its loss or unreasonably refuse to allow a builder to perform rectification works. This provision will only apply to contracts entered into after the amending legislation is proclaimed.
Rectification is the Preferred Outcome
- A tribunal or court will have a standing directive to make a rectification order over an order for compensation where any proceedings are commenced after the amending legislation is proclaimed. The usual provisions should apply, however, that it must be reasonable for the builder or subcontractor to return to rectify.
- Home warranty insurance will be extended to rectification works performed by the original builder. As a result, owners corporations will not have the protection of statutory warranties applying to rectification works and should seek legal advice on appropriate contract mechanisms for rectification works performed by the original builder.
- A Home Warranty Insurance Certificates Register will be available for certificates issued after 1 July 2010 so that searches can be made of what Home Owners Warranty insurance apply to which address
We shall monitor the progress of this legislation and provide further updates as required.
***The above commentary is provided for general information purposes only and does not constitute legal advice, nor does it address the 7 year statutory warranty. For further information in relation to the proposed amendments to the Home Building Act 1989 and how it may impact you contact Bannermans Lawyers on 9929 0226.
Prepared by David Bannerman and Ben Robertson
19 August 2014
- Building Defect Warranty Claims - Retrospective Changes - Draft Home Building Regulation 2014
- Submissions on the Home Building Regulation 2014
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For more information on this topic or any legal enquiries please contact your Strata and Development Team.