5 Practical Issues for the Home Building Changes Commencing 1 December 2014

October, 2014

There has been much concern amongst strata lawyers, strata managers and the media about impending changes to the Home Building Act 1989 (NSW) (“the Act”), and whether those changes will strip rights away from lot owners and owners corporations.

This circular is intended to clarify what you should or should not worry about, so that you can, in a sensible manner, determine whether there are any risks to you or your clients.

The Home Building Amendment Bill 2014 (“the Amendment Bill”) was passed by the Parliament of New South Wales on 28 May 2014. A draft of the Home Building Regulation 2014 (“the Draft 2014 Regulation”), which incorporates the proposed amendments and implements other outcomes following last year’s review of the Act, has also recently been circulated. It is likely that both pieces of legislation will commence operation on 1 December 2014.

Five key amendments, and the practical effect of their implementation, are summarised below. Of note is that the changes to the Act are indicated in the transitional provisions of the Amendment Bill as being retrospective except where indicated as not, but will not affect at all any insurance claims already made or proceedings underway (either claims for defects under the warranties, or relating to insurance claims).

Defect classification

Identifying the type of defect or item, the subject of a breach of the statutory warranties, is often an issue of contention in building disputes, as the classification of the type of defect dictates the time period within which it must be notified and/or claimed by an Owners Corporation.

Significantly, the Amendment Bill replaces the concept of a ‘structural defect’ (under Section 18E of the Act) with that of a ‘major defect’ and has altered the definition such that a ‘major defect’, being a defect to which a 6 year time limitation applies, is one that is:

1. Located in a major element of a building, being:
a. An internal or external load bearing component of a building that is essential to the stability of the building;
b. A fire safety system;
c. Waterproofing; or
d. As prescribed by the Regulations (with the Draft 2014 Regulation providing no further guidance).
2. Attributable to defective design, defective or faulty workmanship, defective materials, or a failure to comply with structural performance requirements; and
3. Causes, or be likely to cause, the inability to inhabit the building, the destruction of the building, or a threat of collapse of the building.

 

Collectively, these requirements establish a higher threshold for claiming ‘major defects’ than the current definition provided for ‘structural defects’, and may lead to the re-categorisation of items which were previously considered to be ‘structural defects’. This is significant because the 6 year warranty period provided in respect of items previously considered to be ‘structural’ items may be reduced to the 2 year warranty period provided for “non-major” or “minor” defects by operation of this amendment.

Whilst the Draft 2014 Regulation does not currently provide guidance as to the types of items which are likely to constitute ‘major’ defects, items in respect of which an argument may be made that a reduced warranty period of 2 years applies include drive ways and automatic sprinkler systems, as well as other items which are unlikely to cause ‘the inability to inhabit the building, the destruction of the building or a threat of collapse of the building’ but which previously ‘prevented the continued practical use of the building or any part of the building’.

This amendment is retrospective and will, therefore, apply to all claims for defects under the statutory warranties and to all home warranty insurance issued, except in circumstances where Court or Tribunal proceedings have been commenced and/or home warranty insurance claims have been made before 1 December 2014.

Duties of a beneficiary of the statutory warranties

The insertion of section 18BA by the Amendment Bill imposes a number of statutory duties upon Owners Corporations as beneficiaries of the statutory warranties. Failure to comply with those duties may make it more difficult to claim against a builder and/or a developer under the statutory warranties, and therefore may also affect a claim by an Owners Corporation against any home warranty insurer (where available).

The new statutory duties include:

  1. The duty to mitigate loss in respect of a breach of a statutory warranty (which already exists under the common law generally);
  2. The duty to make reasonable efforts to notify the builder and/or developer of a defect within 6 months of the breach becoming apparent; and
  3. The duty to allow reasonable access to the builder and/or developer for the purpose of, or in connection with, rectifying the breach.

The Amendment Bill does not make clear what the effect of a failure to comply with such a duty will be, but builders and developers will doubtless seek to argue that a breach of this requirement undercuts, reduces or destroys a right to claim damages for the relevant defects involved.

Further, it is clear from this section that access to the builder and/or developer is to be allowed ‘for the purpose of rectification or in connection with rectifying the breach’. This raises a potential argument that access should not be denied simply because the builder or developer does not have a building licence and/or is not in a position to complete the works himself, but rather must now encompass his right to inspect, investigate and report in defence of the alleged breaches.

In line with the above, steps should be taken (unless limitation dates are expiring shortly) to explore the possibility of allowing the builder and/or the developer to rectify the breaches prior to the commencement of legal proceedings. This may mean for some claims, where there appears to be plenty of time left before the expiry of the time limitation periods, action needs to be taken to negotiate with the builder and/or the developer more promptly given the likely time that will take.

This amendment is not retrospective and will, therefore, only affect building contracts entered in to from 1 December 2014 and claims made under them. However, Owners Corporations should be cautious in withholding access from builders and/or developers in relation to building contracts entered in to prior to 1 December 2014, as the intention of this legislation will possibly be taken into account by the Courts in dealing with those disputes and may have a significant impact on the success of a defects claim.

Diligent pursuit

As a result of amendments made to the Act in 2011, an Owners Corporation has the opportunity to make a claim under home warranty insurance outside of the warranty period if:

  1. The relevant insurance contract was entered into on or after 1 July 2002 (i.e. a “last resort” policy);
  2. The builder had not died, disappeared or become insolvent within the warranty period;
  3. The Owners Corporation properly notified the relevant insurer of the defects within the warranty period;
  4. The Owners Corporation ‘diligently pursued’ enforcement of the statutory warranties; and
  5. A claim in respect of the loss is made to the insurer within 10 years after the work insured was completed.

Diligently pursued” was not defined or made clear in the 2011 amendments, leaving scope for argument.

The proposed Draft 2014 Regulation provides that ‘diligent pursuit’ involves ‘commencing proceedings in a court or tribunal in relation to the relevant breach of statutory warranty, and the beneficiary taking such further steps are reasonable in the circumstances to advance those proceedings’.

Whilst it is clear that the legislature did not intend for Owners Corporations to simply start legal proceedings if there are genuine settlement discussions already afoot, Owners Corporations must consider commencing legal proceedings within the warranty period so as to preserve their right to make a “delayed claim” with the relevant home warranty insurer in the event that the builder dies, disappears or becomes insolvent outside of the period of insurance (but within 10 years of completion). Otherwise, the right to claim under the home warranty insurance is likely to be lost.

Properly, a Regulation cannot have retrospective effect. However, in practical terms, the Draft 2014 Regulation providing a definition in relation to an amendment made in 2011 means that parties and the Courts will likely look to it as a guide as to what the 2011 amendment meant, even if this then leads to argument as to whether or not this is allowed.

Definition of ‘completion’

The insertion of section 3C by the Amendment Bill introduces a new method by which to calculate the date of completion of new buildings in strata schemes. This is significant as the date of completion is the date on which the time limitation period for pursuing builders, developers and/ or insurers commences. This may create confusion given the definition for completion for other work under Section 3B (introduced in 2011) will still exist for other work.

Pursuant to section 3C, the date of completion for new buildings in strata schemes occurs on:

  1. The date of issue of an occupation certificate that authorises the occupation and use of the whole of the building, unless paragraph (b) applies;
  2. The occurrence of some other event that is prescribed by the regulations as constituting completion of the work (with the Draft 2014 Regulation providing no further guidance).

Further, section 3C(3) allows for separate dates of completion in circumstances where a contract to do residential building work comprises the construction of two or more separate buildings. This means that strata schemes which are constructed with two or more separate buildings (where a building is separate if it is reasonably capable of being used and occupied separately from any other building), have separate completion dates in respect of each of those buildings and therefore must be dealt with as having separate time limitation periods in respect of any defects in each of those buildings.

Whilst this definition of completion provides some certainty when compared with the hierarchy established by section 3B of the Act, section 3C(3) will no doubt raise its own set of issues in regards to property common to separate buildings, such as car parks and swimming pools for example. The question also arises as to when only interim or partial certificates are issued, which Section 3B arguably deals with more clearly.

This amendment is retrospective and will, therefore, apply to all claims for defects under the statutory warranty against builders and developers and to all home warranty insurance issued, except in circumstances where Court or Tribunal proceedings have been commenced or insurance claims made on or before 1 December 2014.

Defence to statutory warranty claims

Section 18F introduces a new defence for builders (essentially expanding that previously provided under the Section, and which remains as Section 18F(1)(a) to claims under the statutory warranties for defects where the defects arises from “reasonable reliance by the defendant on instructions given by a person who is a relevant professional acting for the person for whom the work was contracted to be done and who is independent of the defendant, being instructions given in writing before the work was done or confirmed in writing after the work was done.” A relevant professional includes architects, surveyors and engineers, and other specialist consultants.

This change is not retrospective and only applies to work done under building contracts from 1 December 2014. However, for stratum built under these contracts and completed in the future, owners corporations and strata managers will need to keep this in mind when considering whether and against whom to pursue claims for defects.

Other changes

There are various other changes, some of which are retrospective and others not, but we have attempted to focus on what we see as the five most relevant changes, as outlined above.

Contact Mills Oakley

For more information on the Amendment Bill, the Draft 2014 Regulation and how these legislative amendments are likely to affect you, please contact:

paul-jurdeczka

Paul Jurdeczka | Partner
T: +61 2 8289 5819
E: pjurdeczka@millsoakley.com.au

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