By Anthony J Cordato, principal of Cordato Partners.
NSW Fair Trading says that waterproofing, fire safety and structural defects are the ‘holy trinity’ of building complaints it receives from apartment owners, in new multi-storey apartment buildings.
NSW Fair Trading has made reforms to home building laws, and proposes reforms to the strata title law to deal with the problem of building defects.
Engineers Australia says that it is the ‘price and program’ culture which dominates the building industry today which leads to poor building practices. It cites a Federal Government report (2012) that estimates that 85% of strata units in NSW are defective at completion. Engineers Australia proposes a fully prescribed system of certification for every branch of a project to restore the traditional ‘quality of the products’ culture.
The reforms proposed by both NSW Fair Trading and Engineers Australia are complementary. The purpose of this article is to review these proposed reforms.
The proposed strata title law reforms for building defects
Six proposals for building defects are contained in the Strata & Community Title Law Reform Position Paper published by NSW Fair Trading in November 2013, which is currently under review. See below for an extract. These are the proposals, with my comments:
- 1. Encourage defects to be dealt with early: The proposal is that defect rectification be a compulsory agenda item at AGMs for the first two years, to focus the minds of the owners to do something about defects early on, rather than wait until it is too late to claim compensation because they have become wear and tear or lack of maintenance issues.
- My comments: No longer will owners be able to ignore defects, and on-sell new home units to unsuspecting purchasers within the first two years. Purchasers will be able to find out about the defects identified by owners and by building inspectors when they obtain a Strata Inspection Report upon the records of the owners corporation.
- 2. Provide for an independent defects report: The proposal is that the owners corporation engage an independent expert to prepare a defects report within 12 to 18 months after the building is completed. The developer/builder must agree upon the expert and pay their fee. The report is not binding, but can be used by either party.
- My comments: There is no guidance on what detail is to be included in the report. The classification of the defect: as a serious defect or as a cosmetic defect; as urgent or non-urgent; and a scope of works and cost estimates for repair; could all be usefully included.
- 3. Require a bond be paid by the developer: The proposal is that 2% of the contract amount for the building is held by a third party. The proposal is to apply to high rise strata buildings, to encourage early rectification of defects and to not leave the owners corporation empty handed if the developer/builder ceases to trade.
- My comments: 2% is a low amount, given that Engineers Australia quotes rectification costs as up to 27% of building costs. The proposal needs a workable scheme for dispute resolution.
- 4. Restrict the right of developers to vote on defects matters: The proposal is to remove the right of developers (and their associates) to vote at meetings on building defects issues. This right to vote exists for unsold lots, and also in proxies given by purchasers (often for 12 months).
- My comments: This proposal would prevent an obvious conflict of interest.
- 5. Provide for a maintenance schedule: The proposal is for the developer/builder to prepare a maintenance schedule for the common property for the owners consideration.
- My comments: This works for the developer/builder because it gives the opportunity to identify maintenance issues, to distinguish them from defects. This also works for the owners corporation when considering the defects agenda item and in setting up its sinking fund plan.
- 6. Improve the disclosure of information about the building to the owners corporation: The proposal is to expand the existing requirement to provide building plans, by adding a building manual and a maintenance schedule (see above).
- My comments: This will assist in the preparation of the defects report.
Engineers Australia proposed reforms to the certification process
These proposals are contained in a Submission by Engineers Australia to the NSW Government in June 2013, as part of the Strata Review consultative process.
- 1. A certification process: The proposal is that the governance body for each discipline will nominate specific requirements for a structure to be certified. The requirements will cover all aspects of design and site supervision through DA, CC and final certificate.
- My comments: This will assist the builder because the process of certification will support their allocation of responsibility for defects claims.
- 2. The disciplines: The proposal is that these disciplines provide certificates of compliance or adequacy: Architect, Structural Engineer, Civil Engineer & Stormwater, GeoTech Engineer, Mechanical Engineer, Fire Engineer, Building Hydraulics, Acoustic Engineer, Lift Engineer and Energy.
- 3. Professional Indemnity Insurance availability: The certification process proposals would address PI claims which are arising because of an inadequate framework or controls or validations. In time, they would attract more capacity into the PI market and increased levels of competition.
The path forward
The requirements proposed by NSW Fair Trading of defects reports, bonds, building plans and better dispute resolution will identify the areas of concern for owners and the means to deal with them.
The Engineers Australia proposals would assist the developer/builder in meeting its responsibility for defects rectification to the owners corporation by creating clear lines of responsibility with the disciplines. The descriptions on the certificates would assist in identifying the causes of the defects.
Serious consideration should be given to creating a Strata Buildings Defects Ombudsman, in the same way as the Financial Services/Credit Industry, the Telecommunications Industry and the Energy & Water Services Industry all have Ombudsmen.
Will these proposals achieve defect free construction in strata buildings in NSW? No. But one can confidently predict a significant reduction in building defects if the proposals are implemented.