#1 ‘Anywhere, anytime’ inspection powers expansion

Key takeaway: The Home Building Act 1989 (NSW) (‘HBA’) was amended to grant Building Commission NSW power to enter and inspect Class 1 buildings at any time (e.g. freestanding houses, duplexes, and terraces). These powers mimic the Building Commissioner’s existing powers to investigate Class 2, Class 3, and Class 9c Buildings.

The Original Power

Previously under the HBA, a site inspection could be initiated where a complainant lodged a building dispute to the Building Commission NSW.[1] The Commissioner could then appoint an inspector to investigate the dispute, preparing a written report of their findings.[2]

The Expanded Power: ‘Anywhere, anytime’

The Building Legislation Amendment Act 2023 (NSW) (‘BLAA’) amends the HBA to empower the Building Commissioner to authorise inspectors to investigate residential buildings under construction, even without a lodged building dispute.[3] Effectively, the power enables inspections to be conducted ‘anywhere, anytime’. This power is caveated by the need, where the premises is occupied, to obtain the occupants permission or a search warrant to inspect.[4]

Additionally, the HBA now grants more investigative powers, enabling inspectors to take and remove samples, take tests and photographs, inspect records, copy records, seize anything reasonably connected to a defect, and much more.[5]

After inspection, the HBA now allows either (a) rectification orders or (b) stop orders to be issued by the commissioner.[6] A rectification order can be issued to contractors for defective building work, work that could result in a defect, or where other structures or work have been damaged as a consequence of a defect.[7] A stop order will be issued where inspectors believe that if the building work were to continue, there could be significant harm or loss to the public, occupiers, or future occupiers.[8]

Key Takeaways

The ‘anywhere, anytime’ inspection powers should put builders and tradesmen on notice, that their work could be inspected at any time. The expansion reflects the NSW governments push to restore public confidence in the building and construction industry, following reports the over 50% of new residential apartments contain at least 1 serious defect.[9]

Footnotes

[1] Home Building Act 1989 (NSW) s 48C(1) (‘HBA’).

[2] HBA ss 48D(1)-(2).

[3] HBA s 49A.

[4] HBA S 126(3).

[5] HBA s 126(5).

[6] HBA s 49B(1) s 129(1).

[7] HBA s 49B(1)(a-d).

[8] HBA s 129(1)(a).

[9] Insights from the 2023 Strata Defects Survey.

#2 Anti-phoenixing laws

Key takeaway: Directors engaged in illegal phoenixing may have their applications refused and licences cancelled if they have been involved in the management of a company which has become insolvent in the past 10 years.

What is Phoenixing?

Phoenixing is an illegal practice, where a director abandons an existing company and creates a new company that carries on the business of the existing company. This creates issues for creditors seeking payment of debts, complainants seeking relief for defective work, and sub-contractors receiving payment for work completed.

Rule Changes

Under the amended HBA, the Building Commissioner may refuse an application, cancel a licence or disqualify a person from holding a contractor’s licence.[10] These penalties can be applied if the person was a director of a company where the company, or one of its directors, committed an offence under the Corporations Act, or where the person was involved in managing a company within 6 months prior to the company being wound up, entering a deed of arrangement, administration or receivership.

Additionally, this amendment now places the onus on applicants to demonstrate they are not at risk of future insolvency.

Key Takeaways

These amendments aim to protect vulnerable parties in construction work, of which there are many. Construction industry insolvencies account for 30% of all company insolvencies in Australia.[11] Directors should be on notice that there are significant consequences for engaging in illegal phoenixing.

Footnotes

[10] HBA s 33A(1B).

[11] Reserve Bank of Australia.

#3 Decennial Liability Insurance and Strata Building Bond Inspection Scheme for Class 2 buildings

What is Decennial Liability Insurance?

Decennial Liability Insurance (‘DLI’) is a type of insurance which insures the common property of strata apartment buildings (classified under Class 2 buildings). It is taken out by the developer of a strata scheme, for the benefit of the owner’s corporation.

What are the Strata Building Bond Inspection Scheme?

A Strata Building Bond Inspection Scheme (‘SBBIS’) is an amount of money developers must pay to NSW Fair Trading, equal to a specified percentage of the total price payable for all contracts pertaining to a building. This money is held as security to pay for costs of rectifying defective building construction only.

The Changes

Developers are now required to have DLI for 10 years.[12]

Develops are now required to increase their SBBIS from 2% to 3%.[13] If no defects are identified in the 2 years following the date of issue of the occupation certificate, the bond is returned. This change has been deferred to 1 July 2025.

Footnotes

[12] HBA s 211AA(1)(b)(i)-(ii).

[13] HBA s 207.

#4 New suspension powers

The New Power

The Building and Development Certifiers Act 2018 (NSW) ('BDC'), and the Design and Building Practitioners Act 2020 (NSW) ('DBP') have been amended to grant immediate suspension powers. Under the BDC, the Commissioner of Fair Trading (‘the Commissioner FT’) has the authority to immediately suspend the registration of certifiers. Additionally, the Secretary of the Department of Customer Service (‘the Secretary DCS’) can, under the DBP, immediately suspend the registration of any practitioner (including design practitioners, principal design practitioners, building practitioners, and professional engineers).

Applicable Circumstances

The Commissioner FT and Secretary DCS may suspend certifiers and practitioners where (1) notice to show cause has been served, and (2) there are reasonable grounds to believe that (2.1) the person has engaged in conduct constituting grounds for suspension, and (2.2) the person is likely to engage continue the conduct, and (2.3) there is a danger a person or persons may suffer significant harm, loss or damage, as a result of the conduct unless action is taken urgently.[14]

Footnotes

[14] BDC s 47A(1)(b)(i)-(iii); DBP s 65A(1)(b)(i)-(iii).

#5 Building products safety

Key Takeaway: The Building Products (Safety) Act 2017 (NSW) (‘Safety Act’) was amended to establish new duties on significant players in the “chain of responsibility” for building products. The new duties, and penalties, enable regulators to identify and intervene with non-conforming building products. The amendments will take effect in 2025.

Who Is in the “Chain of Responsibility?”

The following people are in the “chain of responsibility” for a building product:

• a person who (i) designs or deals with the product, and (ii) knows, or ought

  reasonably to know, the product will, or is likely to, be used in a building,

• a person who prepares a building design that incorporates or recommends the use of

  the product in the building

  • (Examples: Building designers, engineers, architects).

• a person who used the product in a building

  • (Examples: a person who installs, or coordinates or supervises the installation

    of, the product in a building during construction).

• a person specified in the regulations as a person in the chain of responsibility for the

  product.1[5]

These persons are obligated by the new duties.

The New Duties

Persons in the chain of responsibility owe duties to:

• ensure the use of the product is in compliance.16

• provide information about the product to the next person in the chain of

  responsibility.[17]

• notify the Secretary of any risk of non-compliance or any safety risk.[18]

• recall products when required.[19]

Persons obligated by these duties are expected to perform the duty as far as it is reasonably practicable to do so. They are also to have regard to risk management factors. These factors include: the likelihood harm occurring, the type of harm, whether they knew about the risk or ways to minimise it, and the proportionality of costs associated in removing the risk to the risk.[20]

Penalties for Non-Compliance

The Secretary may issue a building product warning,[21] a building product supply ban,[22] a building product use ban,[23] or the recall of a building product.[24]

The Secretary may seize building products if the Secretary believes on reasonable grounds that:

• a non-compliance risk exists in relation to the product, or

• a safety risk exists in relation to an intended use of the product, or

• the seizure is necessary to determine whether the non-compliance risk or safety risk

  exists, or

• an offence against this Act or the regulations has been committed in relation to the

  product

Breaches to the duty to ensure products conform and are in compliance can result in fines of $165,000 for corporations and $55,000 for individuals.

Breaches of the duty to notify the secretary can result an initial fine of $55,000 for corporations, and an additional $22,000 for each day the offence continues. Individuals may incur an initial fine of $22,000, and an additional $11,000 for each day the offence continues.

Footnotes

[15] The Building Products (Safety) Act 2017 (NSW) s 8B (‘Safety Act’).

[16] Safety Act s 8E.

[17] Safety Act s 8F, s 8G.

[18] Safety Act s 8H.

[19] Safety Act s 8I.

[20] Safety Act s 8D.

[21] Safety Act s 15.

[22] Safety Act s 15B.

[23] Safety Act s 15D.

[24] Safety Act s 15F.

#6 Improving Governance and Contracts: A Research Report on financial, contractual, and governance risks for the construction industry.

Key Takeaway: Plummeting public confidence in the construction industry follows reports that over 50% of new residential apartments contain at least 1 serious defect.25 What is leading to this significant under performance in the construction industry? The Improving Governance and Contract report identifies key trends and risks in projects that lead to poor performance. It also provides several recommendations to the NSW Government to improve the construction industry.

Key trends and risks:

The reviewers identified the following trends and risks.

There are inappropriate relationships between contracting entities (e.g. developers, builders, and consultants). For example, some companies may share a single director. Because there are no governance protocols to ensure contractual negotiations between such parties ‘remain at arm’s length,’ consumers face the risk that there will be improper contracting or limited due diligence in implementing quality assurance processes between the companies.

Parties in projects lacking correct understanding of the necessary forms of contracts. For example, some projects use contract forms designed for smaller home builds, when contract forms for multi-storey developments were needed. Using the wrong type of contract demonstrates a lack of clarity about who is responsible for different elements of the project. This exposes consumers to uncertainty as to whom they can claim against for losses later suffered.

Contracts lacking the needed administrative arrangements. For example, many have no inspection requirements from the Principal Certifying Authority, limited superintendent oversight, and limited requirements that the developer or superintendent to follow best practices in assessing payment claims. Projects without these administrative oversights are more prone to defects being unnoticed, leading consumers to purchase homes with serious defects.

Contracts lacking key elements, like stipulating liquidated damages, the appropriate allocation of risk between developers and buildings, setting out contract particulars, and more. These deficiencies suggest that parties are unlikely to be capable of fulfilling their obligations and liabilities.

Financers inadequately conducting due diligence and risk governance for potential borrowers. Financers relying on ‘catch all provisions’ to manage risk, like ‘you must comply with legislative requirements’ instead of explicitly outlining an in-depth list of requirements.

Partiers only providing certificates of current as proof of insurance to financiers and developers. These certificates do not provide sufficient information about whether proper disclosures to insurers were made or what policy exclusions are present. This means many applicants have not satisfied the insurers requirements.

Key areas for reform:

The suggested reforms aim to improve the quality of projects, by improving the quality of oversight and governance frameworks for financiers.

Reform #1: Financiers to adopt a uniform certification system for certifying that contracts between developers, builders and consultants are carefully reviewed and comply with legislation. This would involve a standard ‘request for information’ that parties must provide to financiers. Information that should be included would be:

• The head contract between developer and builder, and subsequent contracts for

  superintendents and other consultants; and

• An outline of the relationship between the contracting parties. This would include a

  declaration of corporate connections and personal relationships; and

• Consultancy agreements; and

• Copies of insurance policies. This would include policy exclusions, and disclosures

  made to the insurance broker.

Reform #2: Financiers to request details of consultancy agreements, like the principal certifying authority, principal’s representative or superintendent, design team, and quantity surveyor. This will enable consultants to avoid pressure from developers to quote a low price for their services, which leads to lower quality work, and more defects.

Reform #3: Financing documentation to require timely notification of any contractual, legal, or compliance action taken against developers and builders. Additionally, allow a financier representative to be present at meetings that involve authorities in connection to failures to comply with legislation.

Footnotes

[25] Insights from the 2023 Strata Defects Survey.

#7 Intervention powers of the Building Commissioner

The Building Commissioner’s Intervention Powers:

The Residential Apartment Buildings (Compliance and Enforcement Powers) Act 20220 (‘RAB Act’) gives the Building Commissioner and NSW Fair Trading power to investigate serious defects in class 2, 3 and 9c buildings. Additionally, the Commissioner can make various orders to either rectify issues or stop work from continuing.

Class 2 refers to multi-storey or multi use apartment buildings.

Class 3 refers to residential buildings providing long term or transient accommodation for a number of unrelated people. Examples include a boarding house or guest house.

Class 9c refers to residential care buildings, such as residential aged care homes.

Before the Powers can be Used:

After requests to a builder or developer to fix defects go unresolved, the Building Commissioner or Fair Trading may intervene if the following conditions are present:

1. The building is class 2, 3, or 9c.

2. The defect is a serious defect.

3. The intervention will not conflict with an enforceable order may by a court of tribunal.

4. The owners’ corporation or building owner raised the defect with the building or

   developer, but the defect has not been resolved.

5. The builder or developer is still in business (i.e. is still trading, still licenced)

6. The defect is not caused by a failure to properly maintain the building.

7. The complainant reported the issue to NSW Fair trading using the Fair-Trading

   complaint form.

Additional steps for class 2 buildings

For class 2 buildings only, Fair Trading requires additional steps to be taken according to the age of the building:

• 0-2 years since the construction contract was signed: The complaint should be lodge

  under the Strata Building Bond and Inspection Scheme.

• 2-6 years since the construction contract was signed: A defect warranty claim should

  be delivered to the builder first.

• 6-10 years since the construction contract was signed: If the defect was found and

  claimed within the statutory warranty period, but is unresolved, Fair Trading will

  assess the matter pursuant to the RAB Act.

What is a serious defect?

The RAB Act defines a serious defect.26 It is a serious defect in the common property which effects one of the five ‘building elements’:

1. waterproofing;

2. fire safety systems;

3. building enclosures;

4. structural elements;

5. 5. services including electrical, lift, hydraulics, mechanical.

A serious defect means:

1. a building element that does not comply with the performance requirements of the

   Building Code of Australia, the relevant Australian Standards, or the relevant

   approved plans, or;

2. a defect in a building product or building element that is from defective design,

   defective or faulty workmanship or defective materials and prevents the proper use of

   a building or might cause the building to be destroyed or collapse;

3. the use of a building product (within the meaning of the Building Products (Safety)

   Act 2017) in contravention of that Act.

Potential Outcomes:

Upon submitting your complaint, Fair-Trading and the Building Commissioner have several enforcement actions. They may choose to:

• inspect the site;

• issue a building work rectification order;

• issue a penalty infringement notice;

• issue a stop work order or prohibition order;

• commence prosecution.

Prohibition orders can only be issued if there is no occupation certificate. Consequently, when a prohibition order is issued, certifiers are unable to issue an occupation certificate until the defects are fixed. The prohibition order will be lifted once the serious defects are rectified. While this action can give all purchasers confidence that serious defects are not present, it is especially beneficial for purchaser of off the plan property. This is because settlements in these circumstances can usually only happen after the occupation certificate is issued.

Building work rectification orders are issued where the building method is likely to lead to serious defect. The order will set out a list of actions to be taken to ensure the building complies with the relevant Australian Standards. The order will only be removed upon fixing the serious defects.

Footnotes

[26] RAB Act s 4(1)(a)-(f).