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Changes proposed in liability for strata building defects

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11 Nov 2015

Responsibility for defects in strata title buildings is an issue that continues to excite controversy in New South Wales.  In March 2015 there has even been a political party registered to fight for the rights of strata owners.1

In late 2014, the NSW government appointed former Treasury Secretary Michael Lambert to conduct a broad review to examine certification and its application in the wider building industry.2 The review’s broad terms of reference give Mr Lambert the ability to:

  • assess the validity and efficacy of the current Act

  • examine building and subdivision certification and its application in the wider building industry

  • make recommendations for reform

Mr Lambert’s draft report was publicly exhibited during August-September 2015, and he has now delivered his final report to the Secretaries of the Department of Finance, Services and Innovation and the Department of Planning and Environment.  It is yet to be published.

Regardless of the final contents of his report and its recommendations, many areas of controversy will continue.  One of the submissions made to the review was by the Society for Construction Law.3  The submission included:

  • That there should be a statutory obligation upon developers to ensure regulatory and quality compliance by the engagement of professional accredited designers of critical building elements to:

1. undertake design;

2. certify relevant compliance of the design;

3. inspect the construction of those elements during construction; 

4. certify that the elements as constructed comply on completion. 

  • That the statutory obligation should extend to rectification of non-compliant work

  • That the statutory obligation should extend to the directors of developer corporations which are de-registered within a prescribed limitation period

  • That there should be a strengthened certification procedure requiring that design and construction compliance for critical building elements be undertaken by qualified professional practitioners

  • That critical elements such as fire engineering design, fire protection systems and waterproofing of building elements should require certification to be issued only by the accredited professional designer.

These proposals are likely to be controversial, particularly among developers in respect of an extension of their liability.  However, even from a developer’s perspective, there are some positive aspects of the proposals which should be considered. 

It has the potential to allow developers to spread the risk by careful and appropriate use of certification by qualified and insured professionals, and by use of their own insurance. It is only fair that developers will be able to pass the costs of such risk minimisation on to the eventual purchasers, as the aim of this scheme is to promote and encourage better building practices in commercial and large residential strata developments.

Good relations will thus be encouraged between the reputable developers and the reputable certifiers, and this in turn will act as an incentive for highly motivated and capable certifiers to develop and grow their business, which a queuing system for certifiers (as is sometimes suggested) would not do.

Imposing personal liability on the principals of developers for the design is likely to be controversial. However, that liability can in part be passed on to certifiers, and in part insured, and the cost of insurance and certification passed on to the end-customers. Thus there is risk, but also a means of spreading, quantifying and reducing that risk.

Developers as a body may also consider the public relations advantages to be worthwhile: Personal liability combined with a means to ameliorate that liability through insurance and use of properly qualified professional certifiers is likely to be a far more effective deterrent against phoenix companies than the system of mandatory notification by licensees introduced earlier this year. Phoenixing (i.e. the practice of developers establishing sole purpose companies to undertake particular building projects and liquidating the company once the project is completed) has been the subject of widespread adverse public comment.

A related concept that should be considered is an industry-based statutorily regulated insurance scheme to support and complement this statutory extension of liability. Similar to other schemes such as workers compensation, this can ensure that issues recently noted such as minimising inappropriate use of exclusion clauses and claims equalisation, maintaining fair pricing of premium, encouraging risk minimisation by insureds, runoff cover, and some form of no-cover protection for claimants.